IRV 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

IRVINE 

GIFT  OF 


Dr .   and  Mrs . 
JOHN  F.    BELL 


1 


LIBRARY  OF 
ECONOMICS  AND  POLITICS. 

EDITED    BY 
RICHARD  T.  ELY,  Ph.D.,  LL.D. 


LIBRARY    OF    ECONOMICS    AND    POLITICS. 

RICHARD  T.    ELY,   Ph..D,  LL.D.,  Editor. 


NUMBER  ONE 


THE   HISTORY,   ORGANIZATION   AND 
INFLUENCE    OF 

THE  INDEPENDENT  TREASURY 

OF   THE   UNITED   STATES. 


BY 

DAVID    KINLEY,  A.B., 

Fellow  and  Assistant  in  Political  Economy  in  the  University 
of  Wisconsin. 


NEW  YORK:  46  East  Fourteenth  Street. 

THOMAS    Y.    CROWELL    &    CO. 

BOSTON:   100  Purchase  Street. 


Copyright,   1893, 
By  T.  Y.  Crowell  &  Co. 


PREFACE. 


'T^HIS  essay  was  begun  with  the  purpose  only  of  tra- 
cing  the  influence  of  the  Independent  Treasury  on 
business,  the  part  which  constitutes  chapter  vi.  of  the 
book.  But  in  view  of  the  growing  importance  of  the 
subject,  it  seemed  best  to  make  the  study  as  complete  as 
my  opportunities  would  permit.  It  is  hoped  that  some 
light  is  thrown  on  a  matter  that  will  force  itself  on  public 
attention  before  many  years  more,  if  the  evil  of  the 
system  continues  to  grow,  as  it  is  likely  to  do. 

The  essay  was  begun  with  a  prejudice  in  favor  of  the 
sub-treasury  system,  because  it  seemed  pre-eminently  an 
institution  of  the  people.  But  as  a  result  of  the  investi- 
gation I  have  been  forced  to  change  my  opinion,  and 
regard  the  system  as  injurious  to  the  business  interests  of 
the  country. 

I  owe  thanks  to  the  many  friends  who  have  cordially 
helped  me  with  suggestions,  material,  and  criticism.  Dr. 
Ely,  the  editor,  has  kindly  encouraged  me  from  time  to 
time  in  the  work,  and  made  helpful  suggestions  on  many 
points.  Dr.  W.  A.  Scott.  Dr.  F.  J.  Turner,  and  Dr.  C.  H. 
Haskins,  also,  of  the  University  of  Wisconsin,  have  aider! 


IV  PREFACE. 

me  with  valuable  criticism  and  suggestion.  Dr.  J.  A. 
Woodburn,  of  Indiana  University,  kindly  read  a  large 
part  of  the  work,  and  many  changes  were  made  as  a 
result  of  his  friendly  criticism.  I  owe  a  similar  debt  of 
thanks  to  Professor  F.  W.  Taussig,  of  Harvard  Univer- 
sity, and  to  Professor  Woodrow  Wilson,  of  Princeton, 
both  of  whom  have  read  several  of  the  critical  chapters, 
and  made  suggestions  that  have  been  very  helpful  to  me. 
Through  the  kind  offices  of  Professor  Taussig  I  also  got 
the  benefit  of  criticism,  on  the  chapter  concerning  crises, 
from  the  ripe  experience  and  learning  of  Professor  Dunbar. 
I  take  pleasure,  also,  in  expressing  my  appreciation  of  the 
many  courtesies  shown  me  by  the  officials  of  the  Treasury 
Department  at  Washington,  and  by  those  of  the  sub-treas- 
ury in  New  York  City,  especially  the  cashier,  Mr.  Maurice 
Muhleman,  as  well  as  by  many  bank  officers  and  members 
of  the  Stock  Exchange  in  New  York  City.  I  am  indebted, 
moreover,  to  ex-Secretary  C.  S.  Fairchild  for  some  pam- 
phlets ;  and  to  ex-Treasurer  C.  N.  Jordan  for  permission 
to  reprint  his  article  on  "  An  Associated  National  Bank." 
The  chapters  in  the  latter  half  of  the  book  are,  of 
course,  the  ones  that  are  of  most  vital  interest. 

David  Kinley. 
University  of  Wisconsin,  Nov.  i,  1892. 


TABLE   OF   CONTENTS. 


CHAPTER  PAGE 

I.  The  Old  Bank  of  the  United  States i 

II.  The  State  Banks  as  Depositories 16 

III.  Development  of  the  Independent  Treasury     .     .  40 

IV.  The  Organization  and  Work  of  the  Independent 

Treasury 82 

V.  The  Independent  Treasury  and  the  Management 

of  Loans 96 

VI.  The  Influence  of  the  Independent  Treasury  on 

Business 120 

VII.     The  Relation   of  the    Independent   Treasury  to 

Crises 162 

VIII.     Proposals    for    the  Replacement    of    the    Inde- 
pendent Treasury 217 

IX.     A    Reorganization    of    the    Banking    System    to 

Replace  the  Independent  Treasury     .     .     .     :     257 


vn 


APPENDIX 


CHAPTER  PACE 

I.     List  of  Works  Consulted 269 

II.     Sub-Treasury  Law,  and  Amendments       ....  271 

III.  Correct  Currency  Statement 289 

IV.  Average  Monthly  Surplus  of  New  York  Banks  .  250 

V.  The  French  Indemnity  Incident 291 

VI.     Influence  of  Sub-Treasury  on  Bank  Management,  293 

VII.     Rules  Governing  the   Issue   and    Redemption   of 

Currency 296 

VIII.     Regulations  for  the  Deposit  ok  Puiilic  Moneys  .  304 
IX.     Proposals  of  the  Hon.  M.  A.  Harter  as  to  Bonds 

for  the  Basis  of  National  Bank  Circulation   .  308 

X.     Monthly  Government  Receipts  from  Customs       .  310 

XL     Government  Disbursements  for  Four  Years     .     .311 

XII.     Alleged  Repeal  of  Sub-Treasury  Law     .     .     .     .  312 

XIII.  Dates  of  Pensions'  Payments 313 

XIV.  Proposals  of  the  Hon.  C.  N.  Jordan  for  an  Associ- 

ated National  Bank 314 

Index 325 

viii 


THE  INDEPENDENT  TREASURY. 


CHAPTER  I. 
THE    OLD   BANK    OF   THE    UNITED    STATES. 

FEW  questions,  unless  we  except  that  of  the  tariff, 
played  so  prominent  a  part  in  national  politics  down 
as  late  as  1840,  as  did  that  of  a  national  bank.  Its  con- 
stitutionality and  its  expediency,  its  advantages  and  its 
dangers,  its  strength  and  its  weakness  as  a  government 
resource,  were  debated  and  re-debated,  painted  in  dark 
and  in  light,  looked  at  from  every  standpoint,  held  up  for 
praise  and  ridicule,  with  a  violence  of  partisan  feeling 
that  entered  into  but  few  others  of  the  discussions  which 
determined  measures  that  were  to  be  worked  into  our 
political  life.  It  was  a  question  on  which  parties  lost  and 
won  ;  a  question  on  which  great  statesmen  changed  their 
opinions,  and  parties  shifted  their  ground  ;  on  which  there 
was  a  flux  and  reflux  of  public  opinion  and  governmental 
policy,  until  it  was  settled  at  last,  nearly  half  a  century 
ago,  more  as  a  party  issue  than  as  a  question  of  scientific 
economics  ;  a  vindication  of  party  strength,  and  a  neces- 
sary outcome  of  the  drift  of  practical  politics  rather  than 
a  triumph  of  economic  and  financial  truth  over  fallacy, 
or  the  consensus  of  concerted  and  convinced  opinion  as 
to  the  merits  of  the  question. 


2  THE  INDEPENDENT  TREASURY. 

It  was  in  the  third  session  of  the  first  Congress  that 
events  began  so  to  shape  themselves  as  to  point  certainly 
to  a  national  bank  as  a  part  of  our  governmental  ma- 
chinery. In  this  session,  provision  was  intended  to  be 
made  for  the  payment  of  the  debts  of  the  States,  which  had 
been  assumed  by  the  general  government.  The  bitter  hos- 
tility which  the  anti-federalists  had  displayed  towards  the 
adoption  of  the  Constitution  had  been  turned  largely 
against  the  assumption  of  these  debts ;  and  now  that  that 
was  decided,  the  same  hostility  was  displayed  against  the 
measures  of  the  government  to  provide  for  their  payment. 

Secretary  Hamilton  had  made  his  famous  report  on  the 
means  for  the  support  of  the  public  credit,  and  had  pro- 
posed a  scheme  for  a  national  bank.  He  expressed  it  as 
his  opinion  "that  a  national  bank  is  an  institution  of 
primary  importance  to  the  prosperous  administration  of 
the  finances,  and  would  be  of  the  greatest  utility  in  the 
operations  connected  with  the  support  of  the  public 
credit."  The  question  was  discussed,  not  only  with  the 
bitter  hostility  of  partisanship  to  which  the  unsettled 
canons  of  constitutional  interpretation  then  gave  freer 
play  than  they  do  to-day,  but  also  with  a  display  of  ear- 
nest patriotism  and  splendid  talent  which  some  like  to 
think  is  not  seen  to-day.  The  measure,  substantially  as 
proposed  by  Hamilton,  was  finally  adopted,  and  in  1791 
became  a  part  of  the  law  of  the  land,  so  that  for  the  next 
twenty  years  the  first  United  States  bank  was  to  be  a 
feature  of  the  fiscal  administration  of  the  government. 

It  served  its  purpose  well,  and  was  one  of  the  instru- 
ments which  enabled  Hamilton  to  establish  financial  order, 
and,  on  the  solid  foundation  of  re-established  credit,  to 
start  the  country  again  in  the  direction  of  industrial  and 
commercial  prosperity.     In  the  eloquent  words  of  Webster, 


The  old  bank  of  the  united  states.      3 

"  He  was  made  Secretary  of  the  Treasury  ;  and  how  he 
fulfilled  the  duties  of  such  a  place,  at  such  a  time,  the 
whole  country  perceived  with  delight,  and  the  whole  world 
saw  with  admiration.  He  smote  the  rock  of  national 
resources,  and  abundant  streams  of  revenue  gushed  forth. 
He  touched  the  dead  corpse  of  the  public  credit,  and  it 
sprung  upon  its  feet." 

The  question  of  rechartering  the  bank  came  up  in  Con- 
gress in  18 10,  and  was  supported  by  Secretary  Gallatin. 
The  lateness  of  the  session,  however,  prevented  any  action 
until  the  next  year,  when  the  application  for  a  recharter 
was  renewed.  Despite  the  fact  that  "  this  bank,  so  far  as 
we  can  judge  from  the  information  we  have  in  regard  to 
it,  was  soberly  managed,  successful,  and  beneficial  in 
restraining  the  issues  of  the  smaller  banks,"  x  the  bill  was 
lost  under  pressure  from  the  eighty-eight  State  banks  then 
in  existence,  fjut  the  sad  experience  of  the  four  succeed- 
ing years  taught  its  opponents  that  whatever  demerits 
characterized  the  plan  they  had  defeated,  yet  these  were 
far  exceeded  by  those  of  the  system  that  replaced  it.  The 
government  money  had  been  intrusted  to  the  State  banks 
because,  after  the  lapse  of  life  of  the  national  bank,  there 
was  no  other  place  of  deposit.  By  the  act  establishing  the 
department  of  the  treasury,  the  United  States  Treasury  had 
a  legal,  not  a  substantial,  existence.  The  use  of  the  State, 
or  local,  banks  became,  then,  a  necessity.  But  they  be- 
trayed their  trust  ;  or,  at  least,  they  failed  in  the  strain  to 
which  they  were  subjected  in  the  trying  times  of  the  war 
of  181 2.  In  the  fall  of  1814  all  of  the  banks  south  of 
New  England  suspended  specie  payments.  Nearly  one 
hundred  of  them  had  been  fiduciaries  of  the  government, 
and  carried  down  with  them  about  nine  million  dollars  of 

1  Sumner's  "  History  of  American  Currency,''  p.  63. 


4  THE  INDEPENDENT  TREASURY. 

its  funds.  The  government,  in  order  to  meet  its  expenses, 
contracted  loans  which  were  placed  at  between  eighty  and 
ninety,  and  paid  for  in  bank  notes  depreciated  from  ten  to 
twenty  per  cent.  The  lesson  was  heeded,  and  when  appli- 
cation was  made  for  a  charter  for  a  second  United  States 
bank,  the  request  met  but  little  opposition.  Even  Henry 
Clay,  who  in  1811  had  opposed  a  bank,  gave  the  measure 
his  support  now,  although  he  afterwards  explained  1  that 
he  did  so,  not  because  he  believed  in  it  as  a  good  thing, 
but  only  as  necessary  under  the  conditions  then  existing. 

Accordingly,  on  the  10th  of  April,  18 16,  the  bank  act 
was  passed.  It  is  interesting  to  notice  that  Madison  ap- 
proved and  signed  the  bill,  though  in  1791  he  had  parted 
political  company  with  Hamilton  on  an  issue  identical 
with  this,  and  had  at  that  time  laid  down  a  political  dogma 
of  strict  construction  which  his  action  now  violated.2 

The  capital  was  $35,000,000,  one-fifth  of  which  was  to 
be  subscribed  by  the  government  in  coin  or  "  stock  ;  "  one- 
fifth  was  to  be  in  specie,  and  the  other  three-fifths  in  specie 
or  government  stock.  The  bank  was  to  pay  the  govern- 
ment a  bonus  of  $1,500,000;  it  was  to  be  the  depository 
of  the  public  moneys,  and  was  required  to  disburse  them, 
free  of  charge,  in  any  part  of  the  country.  Five  of  the 
twenty-five  directors  were  to  be  appointed  by  the  President. 
The  charter  was,  as  before,  for  twenty  years.  On  the  1st 
of  January,  181 7,  the  bank  opened  for  business,  with  the 
country  on  the  brink  of  a  great  monetary  crisis,  but  "  too 
late  to  prevent  the  crash  which  followed."  The  manage- 
ment of  the  bank  during  the  first  two  years  of  its  existence 
was  far  from  satisfactory.      It   aggravated  the  troubles  of 

1  Benton's  "  Thirty  Years'  View,"  li.  ioo. 

2  Benton  says  lie  yielded  to  the  authorities  without  surrendering  his  con- 
victions.    "  Thirty  Years'  View,'"  i.  323. 


THE   OLD  BANK  OF  THE    UNITED  STATES.        5 

the  financial  situation  instead  of  relieving  them.  Specie 
payments  were  nominally  resumed  in  18 17,  but  the  insidi- 
ous canker  of  inflation  had  eaten  its  way  into  the  arteries 
of  business,  and  in  the  crisis  of  18 19  came  another  suspen- 
sion, that  lasted  for  two  years.  "  In  the  first  two  years  of 
its  existence  the  great  bank  was  carried  to  the  verge 
of  bankruptcy  by  as  bad  banking  as  was  ever  heard 
of.  Instead  of  checking  the  other  banks  in  their  improper 
proceedings,  it  led  and  surpassed  them  all.  A  clique 
inside  the  bank  was  jobbing  in  its  shares,  and  robbing  it 
to  provide  the  margins.  Instead  of  rectifying  the  currency, 
it  made  the  currency  worse.  Instead  of  helping  the  cur- 
rency out  of  the  distress  produced  by  the  war,  it  plunged  the 
country  into  the  commercial  crisis  of  18 19,  which  caused 
a  general  liquidation,  lasting  four  or  five  years.  ...  It  is 
almost  incredible  that  the  legislation  of  any  civilized  coun- 
try could  have  opened  the  chance  for  such  abuses  of  credit, 
banking,  and  currency  as  then  existed."  *  On  April  1, 
1819,  just  fifteen  months  after  the  bank  began  its  career 
for  the  purpose  of  restoring  financial  health  to  the 
country,  the  history  of  its  operations  was  told  in  the  fol- 
lowing statement  of  its  condition:  "Specie,  $126,745.28; 
notes,  $6,000,000;  due  other  banks,  $79,125.99;  due 
government,  $500,000  ;  due  Barings,  $900,000.  .  .  The 
New  York  and  Boston  branches  were  in  worse  condition. 
The  Baltimore  branch  had  given  $3,000,000  discounts, 
of  which  the  parent  bank  had  no  knowledge,  apparently 
from  corrupt  motives.  $1,671,221  were  lost  there.  The 
total  losses  to  date  were  $3,500,000.  Dividends  for 
$4,410,000  had  been  paid,  of  which  $1,348,553  had  been 
gained  by  interest  on  public  securities.  Net  loss  over 
$500,000.     The  bank  now  took  the  most  energetic  meas- 

1  Sumner's  "  Andrew  Jackson,''  p.  233.     (American  Statesmen  Scries.) 


6  THE  INDEPENDENT  TREASURY. 

ures  to  save  itself,  and  in  seventy  days  was  once  more 
solvent,  but  it  had  ruined  the  community.  The  '  golden 
age  '  was  now  far  in  the  past,  and  was  seen  to  be  only  a 
gilt  paper  age  after  all.     The  ruin  was  almost  universal."  1 

It  was  only  by  a  desperate  effort  that  the  bank  finally 
weathered  the  storm  brought  on  by  its  own  mismanage- 
ment and  that  of  the  State  banks. 

After  the  recovery,  a  period  of  several  years  of  prosper- 
ity followed,  and  the  management  of  the  bank  was  thor- 
oughly reorganized  and  sound.  From  this  time  on  until 
the  great  "Bank  War  "  its  affairs  seem  to  have  been  con- 
ducted with  a  view  to  performing  its  duty  to  the  govern- 
ment as  well  as  to  its  individual  stockholders,  and  it 
rendered  such  aid  to  the  public,  directly  and  indirectly, 
as  entitled  it  to  respect  and  fair  treatment  on  the  part  of 
the  servants  of  the  people.  Thus  it  redeemed  its  bad 
past,  and  had  come  to  be  regarded  as  a  permanent  fiscal 
agent  of  the  government,  the  existence  of  which  would  be 
continued  as  a  matter  of  course.  But  the  bank  contro- 
versy was  not  yet  over.  It  was  about  to  be  revived,  and  to 
become  a  prominent  issue  in  a  period  of  our  national 
politics  more  distinguished  for  the  bitterness  of  its  per- 
sonal animosities  than  perhaps  any  other  in  our  annals. 

To  a  complete  understanding  of  the  origin  of  this  bitter 
strife,  we  must  notice  not  only  the  events  and  issues  of  the 
political  turmoil  out  of  which  it  immediately  emerged,  but 
also  a  deeper  influence,  which  really  lay  at  the  bottom  of 
the  political  agitation  of  the  time.  That  influence,  from 
want  of  a  better  name,  we  may  call  the  American  spirit. 
What  this  term  implies  may  be  best  understood  by  briefly 
recalling  the  conditions  of  the  country  and  people  of  that 
time. 

1  Sumner's  "  History  of  American  Currency,"  p.  78. 


THE    OLD  BANK  OF   THE    UNITED   STATES.        7 

With  a  population  of  less  than  twenty  millions,  scattered 
over  a  vast  territory,  with  abundance  of  unoccupied  land 
that  could  be  secured  on  easy  terms,  and  with  a  population 
that  was  mainly  agricultural,  class  lines  were  but  lightly 
drawn,  society  was  more  democratic  than  it  is  now,  and 
the  people  were  in  reality,  as  well  as  in  name,  more  nearly 
"  peers  "  than  they  are  to-day.  The  equality  of  the  Con- 
stitution was  a  realized  fact,  especially  in  the  North. 
Social  equilibrium  was  more  stable,  because  it  was  not 
disturbed  by  the  existence  of  at  least  a  disproportionate 
number  of  those  who  find  it  difficult  to  make  a  comfort- 
able living.  Comfort  and  a  high  standard  of  living  were 
the  lot  of  the  great  majority.  Politically,  the  spirit  of  the 
people  was  intensely  democratic.  There  was  a  marked 
feeling  against  anything  that  looked  like  aristocracy,  that 
had  the  semblance  of  creating  class  distinctions,  or  that 
even  emanated  from,  or  had  any  connection  with,  the  aristo- 
cratic institutions  of  the  Old  World.  In  addition  to  these 
conditions,  perhaps  a  partial  consequence  of  them,  was  a 
widespread  belief,  which  has  not  yet  wholly  disappeared, 
that  the  country,  from  its  peculiar  form  of  government, 
had  little  or  nothing  to  learn  from  the  history  and  experi- 
ence of  the  nations  of  the  Old  World.  We  looked  upon 
ourselves  as  a  "favored  nation,"  with  a  destiny  to  be  worked 
out  on  new  and  independent  lines.  There  was,  withal, 
even  then,  the  "  hurrah  element  "  in  politics,  an  inevitable 
element  of  popular  government,  which,  adopting  some 
catch-word  or  phrase  as  a  rallying  cry,  would  at  times  sweep 
to  victory  on  a  tide  of  popular  feeling  and  with  a  policy, 
or  no-policy,  that  set  reason  and  the  accumulated  experi- 
ence of  years  at  defiance.  In  a  way,  the  American  Eagle 
screamed  louder  then,  with  less  to  scream  about,  than 
he  does  to-day.     And  the  party  leader  who   could    take 


8  THE  INDEPENDENT  TREASURY. 

advantage  of  this  democratic  prejudice  had  an  easy  road 
to  success.  True,  the  sober  second  thought  of  the  people, 
or  the  fruits  of  a  mistake,  would  occasionally  come  in 
time  to  prevent  serious  disaster.  And,  moreover,  our 
gigantic  resources  and  unparalleled  opportunities  have 
at  times  brought  us  safely  through  crises,  despite  our 
own  bad  management.  But  if  there  be  such  a  thing  as 
national  luck,  we  in  this  country  certainly  must  have 
enjoyed  a  good  share  of  it,  since,  in  spite  of  stupendous 
blunders,  we  have  hitherto  managed  to  escape  lasting 
national  disaster. 

One  phase  of  this  anti-aristocratic  feeling  was  mani- 
fested in  an  intense  dislike  of  banks  of  issue.  This  preju- 
dice has  cropped  out  at  times  all  along  in  our  history. 
Even  to-day,  after  an  experience  of  a  quarter  of  a  century 
with  a  bank  currency  unsurpassed  for  safety  and  conven- 
ience by  any  in  the  world,  the  same  prejudice  cries  out 
against  the  supposed  privileges  of  our  National  Banks,  as 
banks  of  issue.  Our  agricultural  classes,  especially,  seem 
to  think  that  these  deprive  the  people  at  large  of  some- 
thing that  rightly  belongs  to  them.  The  resolutions  of 
recent  conventions  of  the  Farmers'  Alliance  unanimously 
favoring  "  the  abolition  of  all  National  Banks  "  are  familiar 
to  all  observers  of  contemporary  politics.  It  is  true,  of 
course,  that  the  National  Banks  have  a  special  privilege 
in  being  allowed  to  make  a  profit  on  issues  secured,  not 
by  their  own  integrity  and  stability,  but  by  the  credit  of 
the  government.  But  the  value  of  this  privilege  now  is 
small,  and  it  can  always  be  easily  regulated  so  that  the 
loss  to  the  people  from  letting  the  banks,  instead  of 
the  government,  issue  notes,  will  be  more  than  offset  by 
the  taxes  collected  on  the  bank  issues,  and  by  the  avoid- 
ance of  the  peculiar  dangers  of  government  paper. 


THE    OLD   BANK  OF   THE    UNITED   STATES.        g 

In  this  feeling  against  the  banks,  again,  experience, 
whether  of  our  own  country  or  of  foreign  lands,  seems 
to  count  for  nothing.  Evidently,  the  existence  of  such  a 
feeling,  whether  reasonable  or  not,  offers  fine  scope  for 
party  manipulation,  of  which,  as  we  shall  see,  the  political 
managers  of  the  "  Bank  War "  were  not  slow  to  take 
advantage. 

In  fact,  the  spirit  of  democratic  equality  and  the  preju- 
dice against  banks  played  a  large  part  in  the  famous  polit- 
ical turmoil  that  resulted  in  the  overthrow  of  the  second 
United  States  Bank,  and  in  the  ultimate  establishment  of 
our  present  sub-treasury  system. 

Doubtless  it  was  largely  the  gratitude  of  the  people  for 
his  military  services,  rather  than  any  realizing  sense  of 
his  administrative  ability  in  civil  affairs,  that  first  placed 
Andrew  Jackson  in  the  presidential  chair.  It  was  his 
success  in  making  his  attack  on  the  bank  appear  as  a 
defence  of  the  interests  of  the  people  and  government 
against  insidious  assaults  of  the  "  moneyed  power,"  which, 
combined  with  the  spirit  of  hero-worship  that  exists  in- 
tensely, though  spasmodically,  in  popular  governments, 
raised  him  to  that  high  honor  a  second  time.  It  is  one 
of  the  numerous  instances  of  the  determining  influence  of 
the  "  shouting  element  "  in  popular  politics.  For  Jack- 
son's acts  during  his  first  term,  so  far  as  they  related  to 
finance  at  least,  can  hardly  be  dignified  by  the  name  of  a 
policy,  or  find  any  justification  in  political  science  or  ex- 
perience. It  is  true,  indeed,  that  in  the  state  of  affairs 
which  prevailed  at  the  time,  his  conduct  was  the  best  he 
could  have  followed  for  the  future  interests  of  the  country. 
For  his  lack  of  financial  ability  would  probably  have 
caused  disaster  if  he  had  attempted  a  positive,  construc- 
tive, plan  of  action.     It  was  well,  therefore,  that  he  was. 


IO  THE   INDEPENDENT  TREASURY. 

content  to  destroy  and  leave  reconstruction  to  more  skil- 
ful hands. 

And  yet  the  country  owes  a  debt  of  gratitude  to  Presi- 
dent Jackson,  because,  even  although  he  was  swayed  by  the 
political  circumstances  of  the  period,  and  by  his  own  in- 
tense personal  convictions  and  prejudices,  he  yet  was  a 
veritable  bulwark  of  popular  rights  against  the  encroach- 
ments of  the  money  power  which  was  exerted  when  the 
bank  degenerated  into  politics.  We  may  not  credit  him 
with  a  foresight  of  the  evils  that  probably  would  have 
arisen  had  the  single  national  bank  monopoly  been  per- 
petuated ;  but  we  may  be  thankful  to  him  for  rendering 
them  impossible  by  destroying,  for  whatever  reasons,  the 
source  whence  these  evils  would  have  sprung. 

The  events  of  what  is  known  as  the  "  Bank  War  "  are 
familiar  to  all  students  of  American  history,  so  that  a 
detailed  account  of  it  is  not  necessary.1  But  it  will  be 
well,  for  our  present  purpose,  to  recall  its  main  features, 
because  it  was  really  the  first  step  in  the  logical  sequence 
of  events  that  led  to  the  establishment  of  the  Independent 
Treasury. 

As  already  said,  the  ten  years  following  the  revulsion  of 
1819-25  were  years  of  almost  unbroken  prosperity.  The 
bank  management  was  sound,  government  credit  was 
excellent,  the  public  debt  was  rapidly  reduced,  and  the 
industrial  and  commercial  situation  was  healthy.  The 
question  of  the  continuance  of  the  bank  was  not  under 
discussion.     In  fact,  scarcely  any  mention  of  the  subject 

1  For  a  general  survey  of  the  whole  matter,  see  von  Hoist's  "  Constitutional 
History  of  the  United  States,"  vol.  ii. ;  Schurz's  "Henry  Clay"  (American 
Statesmen  Series);  Sumner's  '-Andrew  Jackson"  (American  Statesmen 
Series)  ;  "  Thirty  Years'  View  ;  "  Bolles's  "  Financial  History  of  the  United 
States ; "  Young's  "  American  Statesman  ;  "  Story's  "  Commentaries  on  The 
Constitution,"  Book  III.  chapter  xxv.  See  also  bibliography  in  Lalor's 
"  Cyclopaedia  of  Political  Science,"  article  "  Bank  Controversy." 


THE    OLD   BANK  OF   THE    UNITED   STATES.       II 

was  made  until  President  Jackson  referred  to  it  in  his 
message  of  December,  1829.  In  this  message  he  re- 
opened the  question  of  the  constitutionality  of  the  bank, 
but  the  committee  to  which  this  portion  of  the  message 
was  referred  in  the  House  of  Representatives  made  a 
report  favorable  to  the  institution. 

There  seems  no  reason  to  doubt  the  honesty  of  Jack- 
son's opinion  that  the  bank  was  unconstitutional,  and  at 
first  he  probably  had  no  feeling  in  the  matter  except  that 
which  sprang  from  his  convictions  on  this  point.  Certain 
events,  however,  increased  his  hostility  to  the  bank,  and 
strengthened  his  resolution  to  destroy  it.  The  principal 
of  these  were  the  disagreement  that  arose  between  Secre- 
tary Ingham  of  the  Treasury,  and  Air.  Biddle,  president 
of  the  bank,  concerning  the  management  of  the  branch 
bank  at  Portsmouth,  N.  H.  ;  the  delay  of  three  months 
in  paying  five  millions  of  three  per  cent,  government 
stock  which  fell  due  in  July,  1832  ;  the  refusal  to  pay 
drafts  on  the  branch  banks  except  at  the  branches  them- 
selves ;  the  action  of  the  bank  in  the  matter  of  the  French 
indemnity;1  and  the  alleged  interference  of  the  bank  in 
the  presidential  campaign  of  1832. 

When  President  Jackson  first  attacked  the  bank,  the 
weapon  he  chiefly  relied  on  was  the  alleged  unconsti- 
tutionality of  the  charter.  It  was  around  this  point  that 
the  great  battle  of  earlier  days  had  been  fought  and  won, 
when  Hamilton  finally  succeeded  in  persuading  Congress 
to  establish  the  first  bank.  That  was  the  first  of  the 
many  rapid  strides  by  which  the  power  of  the  federal 
government  has  been  gradually  extended  by  the  applica- 
tion of  that  doctrine  of  "implied  powers  "  which  has  been 
so  aptly  called  the  "  chief  dynamic  principle  of  our  Con- 

1  For  an  account  of  this  interesting  episode,  see  Appendix,  p.  V. 


12  THE  INDEPENDENT  TREASURY. 

stitution."  But  the  day,  now  long  since  lost  to  sight,  had 
already  passed  when  an  effort  could  be  successfully 
made  to  check  the  assumption  of  any  authority  by  the 
general  government  on  the  plea  of  "  necessary,"  or  "  im- 
plied," powers. 

Foiled  in  this  line  of  attack,  General  Jackson  turned 
his  attention  to  securing  evidences  of  mismanagement 
and  illegal  procedure,  and  it  was  on  the  basis  of  alleged 
unsoundness  that  he  justified  the  removal  of  the  deposits 
from  the  bank  in  1833.  But  his  effort  to  prove  misman- 
agement was  a  failure. 

Speaking  merely  from  the  point  of  view  of  sound  bank 
management,  in  the  list  of  charges  that  had  been  piled  up 
since  he  first  attacked  the  bank  in  1829,  "  we  can  find 
nothing  but  frivolous  complaints  and  ignorant  criticism 
successfully  refuted,  except  when  we  touch  the  branch 
drafts."  1  There  were,  indeed,  many  points  of  bad  man- 
agement, but  they  were  mistakes  to  be  corrected,  not  to 
be  made  reasons  for  destruction.  The  usurpation  of  the 
important  business  of  the  bank  by  the  Exchange  Commit- 
tee was  wrong  ;  the  discretion  allowed  President  Biddle 
in  the  struggle  was  too  great ;  the  policy  of  temporarily 
loaning  the  cash  in  the  drawer,  on  collateral  securities, 
without  interest,  was  exceedingly  bad  business  policy ; 
these  and  similar  administrative  mistakes  were  the  first 
steps  in  the  career  of  the  bank  that  led  to  its  downfall 
and  ruin.  It  was  guilty  of  great  financial  errors,  but  they 
were  not  beyond  remedy  ;  and  that  they  formed  a  reason- 
able ground  for  such  hostility  as  was  displayed,  is  untrue. 
And  it  may  fairly  be  questioned,  even  although  we  deny 
the  legitimacy  of  the  point,  whether  that  very  hostility  was 
not  a  powerful  force   in   driving  the   institution    into    the 

1  Sumner's  "  Andrew  Jackson,"  p.  267.     (American  Statesmen  Series.) 


THE   OLD  BANK  OF  THE    UNITED  STATES.      1 3 

road  that  led  to  ruin.  It  is  not  proven  that  the  funds  of 
the  bank,  acknowledged  to  have  been  used  in  legitimate 
methods  of  self-defence,  were  ever  devoted  to  the  uses 
of  political  partisanship  at  all.  It  is  hardly  correct  to 
say  that  the  bank  made  a  panic  in  1834,  for  the  tangible 
grounds  of  a  panic  were  absent ;  and  the  crisis  that  came, 
real  and  distressing  as  indeed  it  was,  may  be  fairly 
attributed,  less  to  contraction  by  the  bank,  than  to  the 
fears  engendered  as  to  the  possible  consequences  of  the 
enmity  of  the  Executive. 

In  the  struggle  with  the  President,  the  bank  forgot  that 
it  was  more  than  a  private  institution,  that  one  of  the  pur- 
poses of  its  existence  was  the  service  of  the  government, 
and  that  in  its  capacity  of  fiscal  agent  it  owed  the  country 
a  duty  and  service  with  which  its  private  interests  should 
not  have  been  allowed  to  interfere.  Yet  even  here,  while 
it  cannot  be  justified,  it  might  claim  to  be  excused,  on  the 
ground  that  the  government  itself,  whose  interests  it  had 
in  charge,  was  seeking  to  cripple  its  power  to  conserve 
these  interests. 

For  most  of  the  years  of  its  existence  the  bank  gave 
the  country  a  more  "  uniform  currency  "  than  existed  at 
its  creation  ;  it  facilitated  the  fiscal  operations  of  the  gov- 
ernment ;  it  collected  the  revenues  ;  it  equalized  exchanges  ; 
and  it  gave  a  healthy  tone  to  the  business  of  the  country. 
But  neither  its  principles  nor  its  acts  were  perfect.  It 
was  not  a  panacea  for  industrial  distress,  nor  a  preven- 
tive of  its  occurrence.  It  may  justly  be  charged  with 
sins  of  both  commission  and  omission,  and  the  path  it 
finally  trod,  whatever  the  force  that  impelled  it  thereto, 
can  but  make  us  rejoice  that  its  custody  of  the  people's 
money  ceased  before  it  leaped  over  the  precipice  of  ruin 
on  which  it  for  a  long  time  stood,  and  over  which  it  finally 


14  THE  INDEPENDENT   TREASURY. 

plunged.  The  first  two  or  three  years  of  its  life  were 
marred  by  acts  financially  so  vicious  and  in  their  results 
so  injurious  to  the  people,  that  we  stand  amazed  at  the 
brazenness  of  its  evil  doing,  and  wonder  how  banking 
so  deliberately  selfish  and  pernicious  to  the  interests  of 
society,  could  have  been  permitted  by  the  law.  But  it 
afterwards  assumed  a  course  of  integrity,  and  redeemed 
its  past  by  valuable  service,  until  the  time  when,  in  its  old 
age,  it  again  forgot  the  principles  of  honor,  and  entered 
on  the  period  of  decay.  There  were  in  its  management 
forces  at  work  that,  if  it  had  been  let  alone,  would  prob- 
ably have  finally  worked  its  ruin.  But  they  could  have 
been  checked  if  the  government  had  been  friendly  in- 
stead of  hostile,  and  if  the  bank  had  kept  its  policy  up  to 
the  high-water  mark  of  business  integrity.  As  it  was,  the 
course  of  the  Administration  aided  in  hastening  the  end. 

In  1835  the  "  Bank  War  "  may  be  said  to  have  come  to 
a  close,  so  far  as  actual  conflict  was  concerned,  and  the 
President  had  won.  The  remaining  acts  of  the  bank  were 
only  the  making  of  the  arrangements  of  surrender.  When 
the  time  came,  however,  for  the  charter  to  expire,  the  bank 
did  not  give  up  its  corporate  existence.  It  obtained  a 
charter  from  the  State  of  Pennsylvania,  by  means  that 
would  not  bear  a  critical  examination  according  to  the 
standards  of  either  business  or  political  integrity.  Instead 
of  winding  up  its  affairs  and  paying  the  government  the 
money  it  owed,  it  transferred  all  its  effects  to  the  new  cor- 
poration, and  continued  business  as  before.  It  even  put 
into  circulation  again  the  notes  which  it  had  issued  as 
Bank  of  the  United  States. 

It  may  be  easily  believed  that  the  institution  that  could 
do  this  had  already  sunk  far  below  the  plane  of  strict  busi- 
ness honor.     In  fact,  the  affairs  of  the  bank  were  at  this 


THE    OLD  BAArK  OF   THE    UNITED  STATES.       1 5 

time  very  dishonestly  managed.  No  means  now  seemed 
too  corrupt  for  it  to  use  in  the  accomplishment  of  its  pur- 
poses, and  if  it  had  now  been  in  control  of  the  government 
resources  there  probably  would  be  a  sad  story  to  tell  of 
their  loss.  The  inevitable  end  came  in  the  crash  of  1839. 
The  bank  at  this  time  was  engaged  in  operations  for  which 
it  merits  the  severest  condemnation,  and  against  the  results 
of  which  it  was  not  able  to  sustain  itself.  It  closed  its 
doors  in  October,  1839,  opened  them  for  a  short  period 
afterwards,  and  finally  suspended  in  February,  1841.  It 
managed  to  pay  its  debts,  but  its  whole  capital  was  lost. 
President  Biddle  was  sued  for  over  a  million  dollars,  paid 
out  during  his  administration,  for  which  no  vouchers  could 
be  found.  He  and  several  directors  were  indicted  by  the 
Grand  Jury,  but  were  discharged. 

The  removal  of  the  deposits  to  State  banks,  by  Presi- 
dent Jackson,  in  1833,  was  the  voluntary  use  of  a  system 
which  would  necessarily  have  come  into  operation  at  the 
expiration  of  the  bank  charter.  For  a  few  years  the  sys- 
tem was  used  without  legislative  sanction,  and  its  com- 
pulsory employment,  caused  by  the  downfall  of  the  United 
States  Bank,  was  the  next  step  towards  the  policy  of  an 
independent  treasury.  To  trace  the  history  of  this  step 
and  its  influence  in  the  evolution  of  the  Sub-Treasury 
be  our  effort  in  the  next  chapter. 


1 6  THE   INDEPENDENT  TREASURY. 


CHAPTER    II. 
THE   STATE    BANKS    AS    DEPOSITORIES. 

THE  use  of  the  local,  or  State,  banks  as  depositories 
of  the  public  money  was  not  new.  The  system  had 
been  employed  from  the  time  of  the  adoption  of  the  Con- 
stitution until  the  organization  of  the  first  United  States 
Bank.  It  was  the  inconveniences  and  risks  of  the  system 
that  partly  influenced  Hamilton  in  his  efforts  to  establish 
the  national  bank.  The  State  banks  had  been  used  again 
between  1811  and  1816,  the  interim  between  the  expira- 
tion of  the  life  of  the  first  national  bank  and  the  charter 
of  the  second,  and  again  they  had  proved  so  unsafe  and 
so  false  to  their  trust  that  not  only  did  the  bank  charter 
meet  with  but  little  opposition,  but  the  bitter  experience 
of  the  five  intervening  years  had  converted  some  of  its 
former  opponents  into  friends. 

There  appeared  no  reason  for  thinking  that  the  local 
banks  would  be  more  faithful  to  their  trusts  if  they  should 
be  given  another  trial  than  they  had  been  before.  In 
fact,  if  we  may  trust  Benton,  such  was,  perhaps,  President 
Jackson's  opinion,  for  Benton  seems  to  intimate  x  that  he 
regarded  the  plan  of  using  these  banks  as  depositories  as 
a  temporary  expedient,  and  looked  to  the  ultimate  separa- 
tion of  the  government  from  all  banks.  But  if  the  Presi- 
dent did  really  contemplate  this  separation,  he  saw  that 
its  accomplishment  then  was  an  impossibility. 

1  Cf.  "  The  View,"  i.,  554. 


THE  STATE   BANKS  AS  DEPOSITORIES.  I  J 

Strictly  speaking,  the  government  deposits  were  not 
"  removed  "  from  the  United  States  Bank  in  1833.  The 
government  simply  ceased  depositing  its  receipts  there  ; 
and  the  withdrawal  of  what  was  already  in  the  Bank  took 
place  in  the  ordinary  course  of  government  business. 

The  use  of  the  State  banks  as  depositories,  began  in 
October,  1833.  There  was  no  law  regulating  the  use  of 
these  banks,  and  therefore  the  public  moneys  were  for  a 
time  practically  under  the  control  of  the  President  and 
the  Secretary  of  the  Treasury.  It  fell  to  them  to  select 
the  banks  to  be  intrusted  with  the  public  deposits  and  to 
name  the  conditions  on  which  they  should  be  received 
and  kept.  Contracts  were  made  by  the  Secretary  with 
selected  banks,  according  to  which  the  banks  were  to  give 
security  for  the  government  money  whenever  the  deposits 
should  exceed  one-half  the  bank  capital  paid  in.  In  addi- 
tion, the  government  reserved  the  right  to  demand  security 
whenever  it  was  thought  advisable,  even  if  the  deposits  did 
not  exceed  the  sum  mentioned.  The  banks  furthermore 
agreed  to  perform  for  the  government  all  the  services 
formerly  rendered  by  the  Bank  of  the  United  States. 

The  banks  also  undertook,  by  mutual  agreement,  to 
honor  one  another's  notes  and  drafts,  thus  seeking  to 
provide  a  "general  currency  at  least  as  sound  as  that  of 
the  Bank  of  the  United  States."  They  were  forbidden  to 
issue  small  notes,  and  were  required  to  keep  one-third  of 
their  reserve  in  specie.  The  problem  before  the  govern- 
ment was  to  make  regulations  which  should  secure  the 
safety  of  its  deposits,  and  to  provide  a  circulation  of  State 
bank  notes  to  replace  the  thirty- five  millions  !  soon  to  be 
withdrawn  by  the  national  bank. 

One   immediate  result  of   the  refusal    to  recharter  the 

1  See  Young's  "  American  Statesman,"  p.  666. 


is  the  independent  treasury. 

national  bank,  was  a  "mushroom  crop"  of  local  banks  all 
eager  for  the  government  patronage.  In  his  report,  sub- 
mitted in  December,  1834,  Secretary  Taney  urged  on 
Congress  the  necessity  for  an  act  regulating  the  deposits, 
but  nothing  was  done  about  the  matter.  A  bill  for  the 
purpose  did,  indeed,  pass  the  House,  but  met  its  death 
in  the  Senate  on  the  report  of  the  finance  committee  that 
it  ought  not  to  pass,  mainly  because  its  passage  would  in- 
dicate acquiescence  on  the  part  of  the  Senate  in  the  course 
pursued  by  the  Executive.  The  provisions  of  the  bill  were 
also  regarded  as  inadequate  for  safety.  It  was  not  until 
1835  that  Congress  took  any  action  on  the  matter  of  regu- 
lating the  deposits.  Accordingly,  from  October,  1833, 
until  that  time,  or  for  about  two  years,  they  were  kept 
in  the  State  banks  without  authority  of  Congress,  a  fact 
which  the  President's  opponents  had  unceasingly  used  as 
an  argument  against  him.  The  bill  finally  passed  was 
identical  with  that  which  had  been  defeated  in  the  Senate 
two  years  before.  By  this  act  the  banks  which  could  not 
pay  specie  were  dropped  from  the  list  of  deposit  banks. 
A  circular  letter  of  the  Treasury  Department  to  the 
deposit  banks,  Sept.  26,  1833,  said  :  "  The  deposits  of 
public  money  will  enable  you  to  afford  increased  facilities 
to  commerce,  and  to  extend  your  accommodations  to  in- 
dividuals." It  also  recommended  "merchants  engaged  111 
foreign  trade "  as  the  most  deserving  recipients  of  ex- 
tended credit.  Evidently  the  prestige  of  foreign  trade 
was  yet  tolerably  high,  and  its  fair  name  had  not  yet 
suffered  the  obloquy  that  a  "  Chinese  "  tariff  wall  has 
brought  upon  it  in  these  latter  days.  The  invitation  of 
the  Secretary  of  the  Treasury  to  the  banks  to  use  the 
public  money  as  a  basis  for  enlarging  their  discounts  is 
interesting,  in  view  of  the  fact  that  such  a  use  of  them  by 


THE   STATE   BANKS   AS   DEPOSITORIES.  \C) 

the  national  bank  had  constituted  one  of  the  chief  griev- 
ances against  it  in  the  minds  of  the  supporters  of  the 
administration.  The  hint  was  not  needed,  however.  New 
banks  came  into  existence  every  day,  and  all  increased 
their  discounts  rapidly.  In  the  eight  years  between  1830 
and  1838,  the  bank  capital  of  the  country  increased  from 
$145,192,268  to  $290,772,091  ;  deposits  rose  from  $55,- 
559,928  to  $127,397,185  ;  and  discounts  and  loans,  from 
$200,451,214  to  $525, 115, 702. x  The  signs  of  the  coming 
storm  had  been  gathering  for  a  considerable  period  of 
time.  Imports  had  swelled  from  $101,030,000  in  1832,  to 
$189,980,000  in  1836,  an  increase  of  87  per  cent.  The 
customs  receipts  of  1836  exceeded  by  44  per  cent,  those  of 
the  year  1834,  and  the  sales  of  the  public  lands  for  1836 
were,  for  the  first  time  in  the  history  of  the  country,  in 
excess  of  the  customs  receipts.  The  large  importations 
were  in  this  case  the  indication  of  rising  prices,  of  which 
foreign  manufacturers  were  hastening  to  take  advantage. 
The  upward  trend  of  prices  came  from  the  inflation  of  the 
currency  by  excessive  issues  of  bank-notes.  The  increased 
sales  of  public  lands  were  another  sign  of  the  inflation. 
It  was  by  means  of  these  increased  sales  that  the  govern- 
ment was  enabled  to  get  rid  of  its  debt  and  found  itself 
the  possessor  of  the  surplus  of  millions  that  were  dis- 
tributed, or  "deposited,"  among  the  States  in  1837. 

But,  as  usual,  these  signs  of  a  coming  storm  were  un- 
heeded by  all  save  a  few.  In  1836  came  the  inevitable 
results  —  a  marked  rise  of  prices  and  rife  speculation.  The 
inflation  bubble  grew  rapidly  greater  until,  in  1837,  li 
burst,  scattering  ruin  in  all  directions.  Nearly  all  the 
banks  failed.     They  had  $32,000,000  of  government  de- 

i  Cf.  Sumner's  "  History  of  American  Currency,"  p.  12-5  ;  Bolles*s  "  Finan- 
cial History  of  The  United  States,"  vol.  ii..  p.  346. 


26  THE  INDEPENDENT  TREASURY. 

posits,  $25,000,000  of  which  were  paid  in  notes  depreciated 
ten  per  cent.,  causing  a  loss  of  two  and  a  half  millions.1 

The  catastrophe  was  undoubtedly  hastened  by  several 
acts  of  the  Executive,  which  received  severe  condemna- 
tion at  the  time,  but  must,  in  our  better  light,  meet  with 
approval  and  commendation.  By  order  of  the  Secretary 
of  the  Treasury,  the.  receipt  after  Sept.  30,  1835,  °f 
bank-notes  of  a  denomination  less  than  five  dollars,  had 
been  prohibited.  In  the  following  year  their  payment  to 
public  officers  or  creditors  was  prohibited,  and  no  notes 
less  than  ten  dollars  were  to  be  received  or  paid  by  the 
government  after  an  appointed  date,  July  4,  1836.  More- 
over, the  deposit  banks  were  ordered  to  make  one-fifth  of 
every  payment  which  did  not  exceed  five  hundred  dollars, 
in  gold,  if  so  desired  by  the  creditor.  They  were  also 
requested  to  cease  issuing  notes  below  the  denomination 
of  five  dollars,  by  July  4,  1836,  and  below  ten  dollars,  by 
March  3,  1837.  The  purpose  of  these  regulations  was  "  to 
render  the  currency  of  the  country  more  safe,  sound,  and 
uniform."  Of  course  the  immediate  result  intended  to  be 
produced  was  the  displacement  of  small  notes  by  coin. 
The  orders  were  an  effort  to  create  a  specie  circulation. 
And  within  the  limits  of  the  denominations  chosen  there  is 
no  more  efficacious  method  of  replacing  specie  with  paper, 
or  vice  versa,  than  the  prohibition  of  such  coins  or  notes 
of  the  assigned  denominations  as  are  in  common  use. 

These  orders  of  the  Treasury  Department  were  supple- 
mented by  the  famous  "Specie  Circular,"  issued  July  11. 
1836,  which  raised  public  excitement  to  a  higher  pitch, 
probably,  than  any  other  incident  in  the  bank  war,  unless 
we  except  the  removal  of  the  deposits.  The  object  of 
this  circular  was  to  prevent  the  absorption  of  the  public 

1  Finance  Report,  1838. 


THE  STATE   BANKS  AS  DEPOSITORIES.  21 

lands  by  speculators,  and  to  check  the  accumulation  in  the 
Treasury  of  bank-notes,  many  of  which  would  doubtless 
prove  inconvertible.  It  required  payments  for  public  lands 
to  be  made  in  gold  and  silver.  "The  best  justification  of 
this  measure  was  that  ten  millions  of  paper  on  its  way  to 
the  Land  Office  was  arrested  by  this  circular."  Between 
Aug.  16  and  Dec.  15,  exceptions  were  to  be  made  in  cases 
of  purchases  not  greater  than  three  hundred  and  twenty 
acres.  After  the  15th  of  December  the  operation  of  the 
order  was  unconditional. 

This  famous  '"'  circular "  was  the  pin  that  pricked  the 
bubble  of  inflation.  It  is  unfair  to  say  that  the  responsi- 
bility for  the  panic  that  followed  must  be  laid  at  the  door 
of  these  orders.  The  panic  was  the  result  of  the  tremen- 
dous inflation,  and  would  have  come  in  any  case.  The 
specie  circular  simply  aided  in  hastening  the  explosion, 
thereby  probably  making  its  evils  less  than  they  would 
have  been  had  credit  been  allowed  to  be  inflated  to  its 
self-bursting  point.  Moreover,  the  circular  had  the  good 
effect  of  saving  the  public  lands  from  the  grasp  of  specu- 
lative monopoly,  and  of  making  the  losses  of  the  govern- 
ment less  than  they  would  have  been  had  it  gone  on 
receiving  worthless  notes.  The  measure  had  a  beneficial 
effect  from  the  social  standpoint  also,  in  saving  "  the  new 
States  from  a  non-resident  proprietorship,  one  of  the 
greatest  obstacles  to  the  advancement  of  a  new  country, 
and  the  prosperity  of  an  old  one."  1 

Another  measure  that  had  a  large  influence  in  precipitat- 
ing the  crisis  was  the  law  for  the  deposit  of  the  surplus  rev- 
enue among  the  States.2     Speaking  of  this,  Schurz  says  :3 

1  Jackson's  Message,  24th  Congress,  Second  Session. 

2  For  a  full  account  of  this,  see  Bourne's  excellent  essay  on  "  The  Distribu- 
tion of  the  Surplus  Revenue  in  1837." 

3  In  his  "  Henry  Clay,"  vol.  ii.,  p.  121. 


22  THE  INDEPENDENT  TREASURY. 

"The  effect  of  the  law  was  to  hurry  on  a  crisis.  The  distribution 
of  the  public  deposits  among  the  '  pet  banks '  had  served  to  place 
capital  arbitrarily  in  different  parts  of  the  country,  without  much 
regard  to  the  requirements  of  legitimate  business.  The  regulations 
imposed  upon  the  deposit  banks  by  the  new  law,  especially  the  pro- 
vision that  the  public  deposits  in  no  one  bank  should  exceed  three- 
fourths  of  its  paid-up  capital,  led  in  some  cases  to  an  equally  arbi- 
trary dislocation  of  funds  from  banks  which  had  an  excess  of  deposits 
to  other  banks  in  other  places  which  had  less  than  the  amount 
allowed.  But  the  distribution  of  the  treasury  surplus  among  the 
several  States  produced  this  effect  of  arbitrary  dislocation  on  a  lar- 
ger scale.  On  Jan.  i,  1837,  the  surplus  available  for  distribution 
amounted  to  #37,468,859.  That  surplus  was  nominally  in  the  banks, 
but  really  in  the  hands  of  borrowers  who  used  it  for  legitimate  busi- 
ness or  speculation.  Withdrawing  it  from  the  banks  meant,  therefore, 
withdrawing  it  from  the  business  men  or  speculators  who  had  bor- 
rowed it.  The  funds  so  withdrawn  were  made  for  some  time  una- 
vailable." 

The  failure  of  the  banks  did  not  occur,  however,  until 
May,  1837,  after  Jackson  had  retired  from  the  presidential 
chair.  The  general  suspension  necessitated  a  meeting  of 
Congress  ;  for  the  federal  officials  could  receive  and  pay 
out  the  notes  of  specie-paying  banks  only ;  and  as  the 
deposit  banks  had  suspended  with  the  others,  the  fiscal 
machinery  of  the  government  was  stopped  and  the  action 
of  Congress  was  therefore  needed.  Accordingly,  Presi- 
dent Van  Buren  summoned  an  extra  session  for  Sept.  4, 
1837.  In  his  message  the  President  recalled  the  history 
of  the  various  methods  of  keeping  the  public  money,  and 
remarked  that  although  the  advocates  of  the  use  of 
national  and  State  banks  were  still  to  be  found,  "  it  is 
apparent  that  the  events  of  the  last  few  months  have 
greatly  augmented  the  desire,  long  existing  among  the 
people  of  the  United  States,  to  separate  the  fiscal  opera- 
tions of    the    government    from    those    of   individuals  or 


THE   STATE   BANKS  AS  DEPOSITORIES.  2$ 

corporations."  Van  Buren  himself  argued  against  the 
re-establishment  of  a  national  bank,  on  the  ground  that 
the  people  had  declared  against  it  in  two  elections.  He 
maintained,  too,  that  the  United  States  Bank  did  not,  or 
could  not,  prevent  over-issue  and  depreciation,  an  asser- 
tion which  could  hardly  be  sustained  by  the  facts,  at  least 
in  the  days  of  the  honest  management  of  the  bank's  affairs. 
He  further  declared  that  it  was  no  part  of  the  govern- 
ment's business  to  regulate  "  domestic  exchange,"  and 
therefore  advocated  the  entire  separation  of  the  govern- 
ment from  banks,  proposing  that  it  collect,  keep,  and  dis- 
burse its  own  funds.  The  possibility  of  doing  so  was 
greater  than  ever  before,  and  continually  growing  more  so 
as  the  country  developed,  because  the  difficulties  of  trans- 
fer were  constantly  being  lessened.  This  was  a  rec- 
ommendation of  the  Independent  Treasury,  as  it  was 
called  by  its  friends,  or  Sub-Treasury  as  its  opponents 
named  it.  The  system  was,  in  fact,  virtually  in  operation 
already.  Secretary  Woodbury  informed  Congress  in  his 
report,  that  although  on  the  suspension  of  specie  payments 
six  banks  had  been  retained  as  depositories,  part  of  the 
public  money  was  kept  as  a  special  deposit  in  Washington, 
part  at  the  mint,  and  the  rest  with  the  officers  collecting 
it.  The  Secretary  urged  on  Congress  either  an  enlarge- 
ment and  adaptation  of  this  method,  which  he  was  employ- 
ing on  his  own  responsibility,  or  a  new  organization  of 
commissioners  and  receivers-general,  "  to  gather  the  col- 
lections to  more  central  points,  and  to  keep  the  public 
money,  or  such  as  could  not  be  kept  safely  and  expended 
conveniently  in  the  hands  of  the  collecting  officers." 

The  President  and  the  Secretary  were  not  alone  in  sug- 
gesting plans  of  relief  and  future  action.  Congress  was 
deluged  with  memorials  and  petitions  suggesting  plans  of 


24  THE   INDEPENDENT   TREASURY. 

one  kind  and  another.  Some  had  points  of  merit,  but 
most  were  characterized  by  that  sublime  indifference  to 
history,  experience,  and  economic  law,  that  is  a  marked 
feature  of  the  empiric  schemes  of  which,  in  all  such  crises, 
political  charlatanism  and  ignorance  are  prolific.  One 
interesting  proposal 1  emanated  from  Maryland,  the  author 
being  Littleton  D.  Treackle.  He  proposed  "in  fact  a 
National  Bank  of  Deposits  and  Exchange,  without  the 
faculty  of  discounting  or  circulation,  in  connection  with  a 
system  of  State  institutions  for  the  keeping  and  distribu- 
tion of  the  Federal  revenue,  under  guards  and  guaranties 
commensurate  with  the  wealth  and  credit  of  the  several 
States,"  etc.  These  State  institutions  were  to  be  depart- 
ments of  the  government  and  not  corporations,  and  the 
basis  of  their  circulation  should  be  specie.  For  the  issue 
of  notes  it  was  proposed  to  appoint  commissioners,  State 
and  Federal,  to  "devise  and  prepare"  a  national  currency 
in  convenient  denominations  from  twenty  to  one  thousand 
dollars,  which  should  be  apportioned  among  the  States  in 
proportion  to  their  electoral  votes,  not  exceeding  $100,000 
for  each  Senator  and  Representative.  Each  State  was  to 
receive  its  share  of  this  valuable  paper  on  condition  of  the 
annual  payment  of  one  per  cent  on  the  amount  required, 
and  on  providing  not  less  than  one-fourth  of  that  amount 
in  the  legal  coin  of  the  United  States  as  a  basis  of  its  oper- 
ations. The  principal  institution  of  each  State  was  to 
have  the  custody  of  the  public  money  and  to  provide  for 
its  disbursement. 

This  proposed  national  currency  was  to  be  receivable 
for  all  public  dues,  but  was  not  intended  to  serve  alone  as 
money,  but  to  be  only  auxiliary  to  specie.  The  amount 
suggested   for    issue   was    $28,000,000.      Evidently   thesev 

1  See  Sen.  Doc.  No.  6,  25th  Cong.,  ist  Session. 


THE  STATE  BANKS  AS  DEPOSITORIES.  25 

"  departments "  would  have  been  simply  banks  whose 
notes  were  furnished  by  the  government,  subject  to  a  tax 
of  one  per  cent,  on  the  amount  issued,  and  secured  by  a 
deposit  of  twenty-five  per  cent. 

The  schemes  actually  considered  in  Congress,  however, 
were  three  :  the  revival  of  a  national  bank  ;  the  revival,  or 
continuance,  of  the  deposit  system  established  by  the  act 
of  June  23,  1836  ;  and  the  keeping  of  the  public  money 
by  public  officers.  The  last,  or  Independent  Treasury 
plan,  which,  as  already  said,  received  the  support  of 
President  Van  Buren,  had  been  proposed  as  long  ago  as 
1834,  by  Senator  Gordon  of  Virginia.  It  was  dropped  at 
that  time  from  lack  of  support,  but  was  now  brought  for- 
ward as  the  measure  of  the  Administration  by  Senator 
Silas  Wright1  of  New  York,  who  had  been  a  stanch  and 
consistent  supporter  of  the  Jacksonian  financial  policy. 
The  bill  now  proposed  was  entitled  a  bill  4i  imposing  addi- 
tional duties  as  depositaries,  in  certain  cases,  on  public 
officers,"  and  its  provisions,  as  amended  during  discussion, 
were  essentially  those  that  afterwards  became  the  law  of 
the  land  in  the  final  establishment  of  the  Constitutional 
Treasury,  or  Independent  Treasury,  or  Sub-Treasury,  as 
it  was  variously  called. 

The  measure  was  keenly  debated,  the  "  specie  clause  " 
being  the  main  object  of  attack.  The  adoption  of  this 
clause,  it  was  argued,  would  leave  the  bank  notes  in  the 
hands  of  the  people  and  give  the  specie  to  the  govern- 
ment. It  was  argued  that  convertible  State  bank  notes 
should  be  received  for  government  dues ;  that  the  adop- 
tion of  the  independent  system  wduld  render  the  public 
money  insecure  ;  that  it  would  open  the  way  to  favorit- 

1  See  Gillett's  "  Life  and  Times  of  Silas  Wright."  Vol.  i.,  chap.  lxiv.  and 
elsewhere. 


26  THE  INDEPENDENT  TREASURY. 

ism,  in  such  ways  as,  for  instance,  accommodating  political 
friends  in  the  payment  of  customs ;  that  it  would  contract 
the  currency ;  and  finally,  that  it  would  increase  executive 
patronage  and  so  give  the  President  too  much  power. 
The  Whigs,  moreover,  represented  the  measure  as  an 
attack  on  the  banks  and  the  whole  credit  system  of  the 
country,  and  designated  it  as  an  "  experiment,"  novel  and 
contrary  to  the  habits  of  the  people.  Webster  character- 
ized the  bill  as  a  backward  step,  from  developed  civilized 
credit  to  bolts  and  bars.  "  The  use  of  money,"  he  further 
said,  "  is  in  the  exchange.  It  is  designed  to  circulate,  not 
to  be  hoarded.  All  that  government  should  have  to  do 
with  it  is  to  receive  it  to-day,  that  it  may  pay  it  away  to- 
morrow. It  should  not  receive  it  before  it  needs  it ;  and 
it  should  part  with  it  as  soon  as  it  owes  it.  To  keep  it, 
that  is,  to  detain  it,  to  hold  it  back  from  general  use,  to 
hoard  it,  is  a  conception  belonging  to  barbarous  times 
and  barbarous  governments."  l  That  is  sound  doctrine 
even  for  to-day. 

On  the  other  side,  it  was  urged  that  under  the  proposed 
system  the  public  money  would  be  more  secure,  that  a 
specie  circulation  would  be  promoted,  and  the  currency 
made  more  uniform  ;  that  the  action  of  the  banks  had 
made  the  separation  of  the  government  from  them  neces- 
sary, and  that  a  government  was  not  worthy  of  its  name 
if  it  could  not  manage  its  own  finances.  Further,  it  was 
maintained,  the  failure  of  the  banks  might  at  any  time 
sweep  the  public  deposits  away  and  jeopardize  the  credit 
of  the  country;  and,  finally,  the  Independent  Treasury 
system  would  be  more  plain  and  simple  in  its  arrange- 
ments, and  truer  to  the  spirit  of  the  constitution.  The 
bill  succeeded  in  passing  the  Senate,  but  met  with  defeat 

1  Speech  on  the  Sub-Treasury,  del.  in  the  Sen.  Mar.  12,  1838. 


THE   STATE   BANKS  AS  DEPOSITORIES.  2 J 

in  the  House,  being  laid  on  the  table  by  a  vote  of  120  to 
107.  The  contest  over  it  showed  the  Whigs  ranged  in 
defence  of  the  use  of  State  banks,  which  they  formerly 
opposed,  and  the  friends  of  the  Administration  supporting 
the  measure  which  but  lately  they  had  condemned.  Dur- 
ing the  three  months  that  elapsed  before  the  first  regular 
session  of  the  twenty-fifth  Congress  began,  the  measure 
did  not  apparently  gain  aught  in  the  estimation  of  the 
public.  The  subject  had,  indeed,  been  a  matter  of  wide 
and  earnest  public  discussion  ;  and  on  it,  aside  from  mere 
political  argument,  much  that  was  logically  sound  had  been 
said  and  written.  The  most  elaborate  defence  of  the  plan 
was  set  forth  by  Wm.  M.  Gouge  in  a  pamphlet !  which 
deserves  consideration  as  the  best  exposition  of  the  aims 
and  hopes  of  the  promoters  of  the  system. 

Writing  of  the  chaos  of  repudiation  and  ruin  into  which 
business  had  then  fallen,  the  author  quaintly  compares 
the  condition  of  the  country  to  that  of  the  man  out  of 
whom  the  devil  was  driven  but  returned  with  "  seven  other 
spirits  more  wicked  than  himself,"  so  that  the  "last  state 
of  that  man  is  worse  than  the  first."  The  devil  driven 
out  was,  of  course,  the  United  States  Bank,  and  the  more 
wicked  spirits  typified  deposit  banks,  which  had  wrought 
such  widespread  havoc. 

Gouge  estimated  the  number  of  depositories  that  would 
be  necessary  for  the  transaction  of  the  business  of  the 
Treasury  at  thirty-six,  their  locations  to  be  those  of 
the  banks  formerly  used  as  depositories.  He  thought  that 
the  expense  would  be  less  than  that  of  the  banks,  prob- 
ably aggregating  not  more  than  $101,600.  "  So  plain  would 
be  the  accounts,"  he  goes  on  to  say,  "  that  we  might  choose 

1  "  An  Inquiry  into  the  Expediency  of  Dispensing  with  Bank  Agency  and 
Bank  Paper  in  the  Fiscal  Concerns  of  the  U.  S."   Philadelphia,  1S37,  pp.  56. 


28  THE  INDEPENDENT   TREASURY. 

for  chief  book-keepers  of  these  Sub-Treasuries  the  disci- 
ples of  the  ingenious  cordwainer  who  daily  threw  into  the 
leg  of  one  boot  a  slip  containing  a  statement  of  his  receipts 
for  the  day,  and  into  the  leg  of  the  other  a  slip  contain- 
ing a  statement  of  his  expenditures." 

The  probabilities  of  loss,  Gouge  declared,  would  be 
less  with  independent  depositories  than  with  banks;  for 
there  would  be  less  loss  from  fire,  since  the  deposits  would 
be  in  specie  ;  less  from  peculation,  because  the  accounts 
would  be  simpler ;  and  less  from  robbery  because  thieves 
could  carry  off  but  little  of  the  metallic  money,  on  account 
of  its  weight !  To  the  objection  that  the  system  would 
lock  up  money,  the  author  replied  that  there  should  be 
no  surplus  to  lock  up.  The  inconvenience  of  transfer 
could  be  obviated,  he  declared,  by  the  use  of  drafts ;  and 
gold  and  silver  payments  could  be  easily  maintained. 
Gouge  held,  contrary  to  the  general  opinion,  that  the 
system  would  decrease  executive  patronage.  These  views 
of  Gouge's  are  exceedingly  interesting  because  they  show 
how  widely  even  the  most  intelligent  of  the  advocates  of 
the  Independent  Treasury  miscalculated  the  scope  and 
influence  of  the  system,  and  underrated  the  growth  of  the 
fiscal  life  of  the  government. 

Congress  assembled  again  on  the  4th  of  December. 
President  Van  Buren  again  recommended  his  favorite 
measure,  and  again  it  was  brought  before  the  Senate  by 
its  champion,  Mr.  Wright,  but  only  to  have  its  success  in 
the  Senate  once  more  offset  by  defeat  in  the  House 
of  Representatives.  The  debate  was  participated  in  by 
Clay,  Calhoun,  Webster,  and  others,  in  speeches  of  the 
power  and  brilliancy  that  characterized  their  great  auth- 
ors, but  the  arguments  were  mainly  political. 

The  subject  was  again  brought    up,  in   the  session  of 


THE  STATE  BANKS  AS  DEPOSITORIES.  29 

1839-40,  after  it  had  been  urged,  as  usual,  by  President 
Van  Buren  in  his  message.  And  then  at  last  the  bitter 
struggle  came  temporarily  to  an  end.  The  Independent 
Treasury  was  established.  It  barely  escaped  its  former 
fate  in  the  House  ;  for  it  passed  that  body,  June  30, 
1840,  after  long  and  bitter  debate,  only  by  the  small 
majority  of  seventeen,  in  a  total  vote  of  two  hundred  and 
thirty-one.  According  to  the  act,  one-fourth  of  all  govern- 
ment dues  had  to  be  paid  in  specie  after  June  30,  1840, 
and  an  additional  one-fourth  had  to  be  so  paid  each  suc- 
cessive year  until  the  whole  should  become  thus  payable. 

Thus  was  at  length  established  the  system  for  which 
Van  Buren  had  risked  his  office  —  risked  and  lost.  For 
the  idea  was  adopted  by  him  as  his  own,  and  although  he 
pushed  it  perseveringly  on  to  success,  in  the  very  achieve- 
ment of  that  success  "  it  helped  sink  the  originator." 
But  the  country  owes  a  debt  of  gratitude  to  him  for  his 
persistent  adherence  to  a  "  hard-money  "  system.  The 
severance  of  the  government  from  the  banks,  as  banks 
were  then  constituted,  relying  largely  as  they  did  on 
government  support  for  the  convertibility  of  their  notes, 
was  the  means  of  removing  a  large  element  of  uncertainty 
from  the  credit  of  the  government,  and  of  insuring  to  the 
currency  the  "  soundness "  for  which  the  people  had 
struggled  so  long  in  vain.  It  was,  therefore,  an  act  of 
wise  statesmanship,  commendable  to  its  promoter,  and 
worthy  of  the  gratitude  of  all  who  believe  in  maintaining 
the  credit  of  the  country ;  and  a  large  share  of  this 
credit  must  be  accorded  to  Mr.  Van  Buren  ;  for  although 
he  fell,  his  fall  was  not  the  reward  of  a  bad  policy,  but 
rather  of  the  political  expediency,  party  exigency,  and 
ignorant  prejudice  which  in  all  governments  so  often 
pull  large  men  down  to  set  small  ones  up,  and  supplant 


30  THE  INDEPENDENT  TREASURY. 

sound  and  statesmanlike  policies  with  those  that  are 
weak  and  charlatanical.  For  it  certainly  was  his  adher- 
ence to  his  fiscal  policy  which  wrecked  Van  Buren's 
Administration  on  the  lee  shore  of  adverse  popular  opin- 
ion, and  which,  altogether  aside  from  the  ephemeral  feel- 
ings and  fantastic  exhibitions  that  influenced  the  masses 
in  the  next  presidential  campaign,  created  in  the  minds  of 
the  soberer  portion  of  the  nation  the  current  of  opinion 
on  which  Harrison  was  borne  to  victory  in  1841. 

The  shortness  of  Harrison's  Administration  prevented 
any  action  on  the  Sub-Treasury  and  the  currency.  But 
Tyler,  on  his  accession,  declared  his  intention  of  adhering 
to  the  policy  which  Harrison  and  the  party  were  known  to 
favor.  Under  a  proclamation  which  had  been  issued  by 
Harrison,  Congress  assembled  in  special  session  on  the 
last  day  of  May,  1841.  In  calling  attention  in  his  mes- 
sage to  the  state  of  the  revenue  and  the  currency,  Tyler 
proposed  no  definite  plan  of  reform.  The  people  had,  he 
thought,  sustained  Jackson  in  his  course  against  the  na- 
tional bank  ;  the  State  bank  deposit  policy  and  the  Sub- 
Treasury  had  both  been  condemned ;  therefore  he  left 
the  whole  question  to  Congress,  saying  :  — 

"  I  shall  be  ready  to  concur  with  you  in  the  adoption  of  such  a 
system  as  you  may  propose,  reserving  to  myself  the  ultimate  power 
of  rejecting  any  measure  which  may,  in  my  view  of  it,  conflict  with  the 
Constitution,  or  otherwise  jeopard  the  prosperity  of  the  country." 

Bills  were  immediately  introduced  into  Congress  for  the 
repeal  of  the  Sub-Treasury  act,  and  for  the  incorporation 
of  a  bank.  As  usual,  a  large  number  of  petitions  and 
resolutions  for  and  against  the  movement  were  sent  to 
Congress,  but,  as  usual  also,  they  could  be  regarded  only 
as  expressions  of  party  fealty,  and  not  as  intelligent  opin- 


THE  STATE  BANKS  AS  DEPOSITORIES.  3  I 

ions  based  on  careful  consideration  of  the  merits  of 
the  question.  During  the  year  since  its  establishment  the 
Sub-Treasury  system  had  worked  more  smoothly  than 
might  have  been  fairly  expected.  Secretary  Ewing  took 
occasion,  in  a  report  of  July,  1840,  to  argue  against  the 
system.  He  maintained  that  it  exposed  the  government 
funds  to  risks  of  loss;  that  it  was  cumbrous,  expensive,  and 
inconvenient ;  that  it  tended  to  centre  disbursements  in 
some  Eastern  cities,  especially  New  York  ;  and  that  it  in- 
jured business  by  contracting  the  currency.  He  reviewed 
the  history  of  the  government  policy  in  the  matter  of 
keeping  its  own  money,  recalling  the  fact  that  there  had 
been  two  periods  of  twenty  years  each  in  which  a  national 
bank  was  used,  and  intervals,  comprising  a  period  of  nine 
years,  in  which  State  banks  were  employed.  During 
the  rest  of  the  time  the  funds  were  administered  by  indi- 
vidual officers  and  agents. 

The  Secretary  said  that  the  losses  under  the  State  bank 
system  from  181 1  to  1816  had  been  about  one  million  of 
dollars;1  from  1833-1837  there  had  been  no  money  loss, 
but  much  inconvenience.  There  had  been  no  loss  through 
either  of  the  national  banks,  and  no  delay  or  expense 
in  transmitting  public  money,  so  far  as  the  banks  were 
concerned.  The  Secretary  recommended  the  establish- 
ment of  a  bank,  for  which  he  afterwards  submitted  a  plan 
the  fate  of  which  is  told  below.  In  fact,  the  results  of 
the  trial  of  the  Sub-Treasury  failed  to  justify  any  of  the 
prophecies  of  the  Whigs.  It  may  be  fairly  said,  however, 
that  this  was  the  result  of  circumstances  rather  than  of 
any  merits  of  the  system,  for  the  conditions  were,  on  the 
whole,  favorable  to  success.  However,  the  Sub-Treasury 
Act   was  repealed  Aug.   13,   1841,  and  a  bill  was  imme- 

1  Finance  Reports,  1833  and  1837. 


32  THE  INDEPENDENT   TREASURY. 

diately  reported  by  Henry  Clay  for  the  establishment  of 
a  bank.  Clay  personally  preferred  a  bank  after  the  old 
pattern,  but  yielded  to  the  wishes  of  the  President  and 
his  friends,  and  recommended  an  institution  substantially 
such  as  they  desired.  The  course  pursued  by  President 
Tyler  with  reference  to  the  establishment  of  the  bank 
is  curious  but  painful  reading.  He  vetoed  Clay's  bill, 
though  it  had  been  passed  by  both  Houses  in  the  con- 
fident expectation  of  his  approval.  He  asked  his  Secre- 
tary of  the  Treasury  to  draft  a  bill,  and  his  request  was 
complied  with  even  to  naming  the  proposed  institution  to 
suit  his  whim.  He  approved  the  plan  when  read  at  a 
Cabinet  meeting.  Congress  passed  it  unchanged  except 
in  two  points,  and  sent  it  to  him.  He  talked  over  it, 
wept  over  it,  prayed  over  it  —  and  vetoed  it,  on  constitu- 
tional grounds  that  militated  equally  against  the  bill  of 
Secretary  Ewing,  which  he  had  approved.  The  veto  fell 
like  a  thunderbolt  on  his  party,  and  it  deserted  him.  All 
the  members  of  his  Cabinet  except  Webster  resigned,  and 
the  country  beheld  the  novel  spectacle  of  a  President 
without  a  party.  He  broke  his  faith  on  the  rocks  of 
vacillating  purpose  and  conceited  ambition,  and,  as  he 
deserved,  was  left  stranded  on  them,  alone. 

Yet  it  was  fortunate,  perhaps,  that  both  the  bills  men- 
tioned were  vetoed,  for  ejther  of  them  would  have  been 
likely  to  work  great  mischief  to  the  country.  Some  of  the 
provisions  of  Ewing's  proposed  plan  were  as  follows:  The 
bank,  which  must  be  in  the  District  of  Columbia,  was  to 
have  a  capital  of  thirty  million  dollars.  It  could  establish 
branches  in  the  different  States,  but  only  with  the  consent 
of  the  States  and  under  their  control.  The  government 
subscription  of  six  millions  was  to  be  in  "  stock  "  created 
for  the  purpose,  and  the   States  were  to  be  allowed  the 


THE  STATE  BANKS  AS  DEPOSITORIES.  33 

privilege  of  subscribing  in  a  similar  way.  The  bank  was 
to  perform  the  usual  duties  of  the  "  fiscal  agent  "  of  the 
government,  and  all  government  debts  were  to  be  dis- 
charged by  checks  payable  in  the  notes  of  the  bank, 
which  were  also  receivable  for  government  dues.  Divi- 
dends were  to  be  limited  to  six  per  cent.,  and  all  surplus 
above  two  millions  of  dollars  was  to  go  to  the  gov- 
ernment. The  bank  could  not  incur  a  debt  of  over 
twenty  millions  more  than  its  deposits,  nor  make  loans 
to  more  than  one  and  three-fourths  times  its  capital.  Its 
specie  reserve  must  be  at  least  one-third  of  its  circulation. 
Its  dealings  were  to  be  limited  to  coin,  bullion,  notes, 
and  inland  bills  of  exchange  ;  and  no  loan  could  be  made 
for  more  than  six  months,  and  no  debt  could  be  renewed. 
The  limit  of  a  government  loan  from  the  bank  was  to  be 
three  millions,  for  not  more  than  six  months.  The  charter 
was  to  be,  as  usual,  for  twenty  years.  Congress,  in  adopt- 
ing the  plan,  raised  the  dividend  rate  to  seven  per  cent., 
stopped  all  discounts  and  loans  when  the  note  circulation 
amounted  to  three  times  the  specie  on  hand,  and  rejected 
the  provision  requiring  the  consent  of  the  States  to  the 
establishment  of  branches. 

In  criticism  of  this  plan  it  may  be  said,  first,  that  if  the 
government  is  to  own  shares  at  all,  it  should  pay  in  its 
capital  like  any  other  stockholder.  This  same  mistake 
was  made  in  the  case  of  the  United  States  Bank.  In  its 
financial  aspect  it  resembles  the  conduct  of  railroad  "  pro- 
moters "  who  issue  stock  certificates,  a  certain  amount  of 
which  they  divide  among  themselves  without  paying  in  a 
dollar  of  the  capital.  It  was  an  effort  to  share  the  gain 
without  sharing  the  risk  of  loss.  The  burden  was 
thrown  on  the  other  stockholders.  Still,  this  was  less 
vicious   financially   than    some    of   the    other   provisions. 


34  THE  INDEPENDENT   TREASURY. 

The  absolute  prohibition  of  the  renewal  of  debts,  the  debt 
limitations,  and  the  support  given  to  the  credit  of  the 
bank  notes  by  the  government  credit,  were  bad  features. 
The  limitation  of  possible  loans  to  the  government  was 
a  ridiculous  attempt  to  check  the  possible  abuse  of  execu- 
tive power  and  patronage.  The  limitation  on  discounts, 
if  put  into  rigid  operation  on  the  verge  of  a  crisis,  would 
have  precipitated  a  panic,  exactly  contrary  as  it  was  in 
effect  to  the  method  of  freely  discounting  at  such  times 
that  has  received  the  sanction  of  the  experience  and  the 
judgment  of  wise  bankers.  The  rejection  of  this  plan  and 
its  predecessor  is  one  of  those  cases  in  which  the  very 
weakness  of  a  man  like  Tyler  accomplishes,  in  spite 
of  him,  the  good  he  seeks,  though  in  a  way  the  exact 
opposite  of  what  he  intends. 

During  the  next  few  years  the  subject  was  less  dis- 
cussed, as  it  was  supplanted  in  public  attention  by  the  ques- 
tions of  the  tariff  and  the  annexation  of  Texas.  In  the 
third  session  of  the  twenty-seventh  Congress,  however, 
the  matter  came  up  again.  The  Committee  of  Ways  and 
Means  made  a  report  on  the  President's  proposed  "  Plan 
of  an  Exchequer,"  condemning  the  Sub-Treasury,  passing 
by  the  State  bank  system  as  already  rejected  by  the  peo- 
ple, and  as  unsafe  on  account  of  the  failure  of  the  banks, 
and  praising  the  old  national  bank  system.  The  Com- 
mittee's opinion  of  the  Sub-Treasury  is  shown  in  the  fol- 
lowing remarks  :  "  Its  model  may  be  found  in  the  imperial 
institutions  of  Darius,  the  king  of  Persia,  and  its  princi- 
ples have  descended,  with  little  modification  and  slight 
improvement,  it  is  believed,  through  all  governments  where 
banks  do  not  exist,  and  are  now  found  in  perfect  operation 
in  the  island  of  Cuba." 

In  its  details  the  exchequer  plan  was,  according  to  the 


THE  STATE   BANKS  AS  DEPOSITORIES.  35 

committee,  essentially  the  Sub-Treasury  with  certain  bank- 
ing functions  added,  and  herein  was  the  main  objection  to 
the  scheme.  When  the  bill  came  before  Congress  a 
remarkable  amendment  was  submitted  by  one  member.1 
He  proposed  the  issue  of  one  hundred  millions  of  dollars, 
bearing  interest  for  ten  years  at  two  and  a  half  per  cent., 
based  on  the  public  lands  as  security,  and  to  be  distributed 
among  the  States  in  proportion  to  their  respective  "  federal 
numbers."  According  to  this  plan,  "  fiscal  agencies " 
were  to  be  established,  whose  beneficent  operations,  com- 
bined with  the  blessings  of  the  land  currency,  would  bring 
on  a  millennium  of  prosperity  of  which  the  present  advo- 
cates of  "  coining  all  the  land  of  the  country  "  have  never 
dreamed.  The  proposed  scheme  is  one  of  the  most  curi- 
ous of  the  monetary  vagaries  that  have  been  brought  to 
public  attention  in  our  short  history  as  a  nation. 

During  all  this  time  the  government  officials  kept  the 
public  money  as  best  they  could.  That  is,  the  unlegalized 
system  of  government  agents  as  depositaries  continued,  and 
the  operations  of  the  Treasury  rested  on  the  law  of  1789 
and  the  resolutions  of  18 16.  Many  of  the  public  officials 
deposited  in  selected  banks. 

In  his  message  at  the  opening  session  of  the  twenty- 
ninth  Congress,  President  Polk  revived  the  matter  and 
urged  the  re-establishment  of  the  Sub-Treasury.  Secretary 
Walker  came  to  the  President's  aid  in  his  annual  report, 
and  brought  forward  anew  the  arguments  so  often  pre- 
sented against  the  use  of  banks.  Though  he  advocated  their 
complete  and  final  rejection,  he  pointed  out  the  uselessness 
of  establishing  a  constitutional  Treasury  "  if  it  is  to  receive 
or  disburse  the  paper  of  banks."  The  proposed  measure 
again  underwent  earnest  public  discussion  and  again  met 
with    strenuous  opposition.     The    arguments  which  were 

1  Horace  Everett,  of  Vermont. 


$6  THE  INDEPENDENT  TREASURY. 

brought  forward  were  pretty  much  the  same  that  had  been 
used  before,  but  the  long  discussion  enabled  them  to  be 
presented  in  a  more  complete  form.  It  was  again  urged  in 
favor  of  the  Independent  Treasury  that  the  union  of  the 
government  with  the  banks  was  unconstitutional.  The 
constitutional  argument,  on  both  sides,  is  of  only  historical 
interest  now,  but  it  is  perhaps  worth  while  to  note  its 
points.  The  constitutional  argument  for  the  Sub-Treasury 
was  based  on  the  words  of  the  Constitution  that  "  no 
money  shall  be  drawn  from  the  Treasury  but  in  conse- 
quence of  appropriations  made  by  law."  This,  it  was  main- 
tained, meant  "  a  substantive  treasury,  substantial  treas- 
urer, and  a  real  treasurer."  Again,  the  first  Congress,  in 
establishing  the  Treasury  Department,  declares  that  "  it 
shall  be  the  duty  of  the  Treasurer  to  reserve  and  keep  the 
moneys  of  the  United  States."  Of  course  the  argument 
from  this  provision  depends  on  the  logical  content  of 
"  receive  "  and  "  keep."  If  "  keep  "  is,  as  the  adherents  of 
the  proposed  system  urged,  to  be  understood  literally,  why 
not  also  "  receive  "  ?  But  for  the  Treasurer  personally  to 
handle  all  the  receipts  of  the  government  is  impossible. 
Moreover,  what  is  the  literal  meaning  of  "  keep  "  in  this 
connection  ? 

The  whole  constitutional  argument  against  the  use  of 
banks  by  the  government  was  but  a  phase  of  the  old  doctrine 
of  States'  Rights  and  Supremacy  which  prevented  Congress 
from  assuming  such  control  over  the  banking  system  of 
the  country  as  would  have  made  it  safe,  would  have  pre- 
vented "  wild-cat "  banking,  would  have  saved  the  finan- 
cial good  name  of  the  country,  and  would  have  made  the 
sub-treasury  system  unnecessary  by  making  the  banks  as 
safe  for  government  use  as  they  are  to-day. 

The  arguments  urged  in  favor  of  the  banks  were  the  safer 


THE  STATE  BANKS  AS  DEPOSITORIES.  T>7 

keeping  and  the  free  and  safer  transmission  of  the 
public  moneys;  the  easier  and  more  inexpensive  collection 
of  the  government  revenues  ;  the  greater  facility  of  obtain- 
ing loans,  and  the  receipt  of  interest  by  the  government 
on  its  deposits.  The  first  of  these  arguments,  as  to  the 
safer  keeping  and  transmission  of  the  government  money, 
is  patently  weak.  As  Mr.  Niles  had  years  before  remarked, 
a  government  is  not  worthy  of  its  name  if  it  cannot  protect 
its  own  property.  And  if  it  cannot  protect  its  own  prop- 
erty how  could  any  bank  do  so  when  the  government  is 
the  ultimate  source  of  protection  to  the  bank  ?  The  only 
strength  of  the  argument  lies  in  the  fact  that  if  a  bank 
should  lose  government  deposits  it  would  have  to  replace 
them — if  it  could,  if  it  had  any  means  left  wherewith  to 
do  so.  The  matter  of  interest  is  unimportant  and  should 
have  no  weight  by  the  side  of  other  considerations.  A  far 
more  weighty  objection  to  the  system  under  discussion  was 
brought  forward  when  it  was  said  that  the  continued  pay- 
ment of  government  debts  in  coin  was  impracticable.  The 
use  of  treasury  notes,  it  was  said,  would  become  necessary, 
and  they  would  remain  at  par  only  so  long  as  public 
deposits  were  on  hand.  The  argument  had  some  truth 
in  it,  but  it  was  not  true  to  the  extent  its  advocates  thought 
or  maintained.  Aside  from  political  exigencies,  under  a 
sound  system  of  finance,  payments  in  actual  specie  are 
only  inconvenient  and  costly,  not  impracticable,  in  some 
varying  proportion  to  their  amount  and  frequency. 

In  a  review  of  the  subject  the  editor  of  the  Ba?ikers' 
Magazine  '  asserted  :  "  That  scheme  [the  Sub-Treasury] 
we  consider  utterly  impracticable  and  indefensible."  Such 
a  law  "  cannot  be  in  force  for  six  consecutive  months,  nor 
will  it  be,  in  our  opinion,  strictly  complied  with  for  forty- 
eight  hours." 

1  Vol.  i.,  p.  15  (1845-46). 


38  THE   INDEPENDENT  TREASURY. 

The  subject  went  the  old,  weary  round  of  discussion  in 
Congress,  supported  and  attacked  with  arguments  that 
applied  and  arguments  that  did  not,  with  arguments  to 
the  point  and  arguments  aside  from  the  point,  and  emerged 
at  last  into  light  from  behind  the  clouds  of  personalities, 
party  animosities,  and  "  counsel  without  knowledge,"  that 
more  or  less  darkened  the  subject  during  the  whole  ten 
years  from  the  time  when  it  had  been  first  proposed. 

As  before,  the  hottest  fight  was  made  over  the  provision 
requiring  receivers  and  disbursers  of  the  public  money, 
including  all  postmasters,  to  receive  and  pay  out  specie 
only.  On  the  face  of  it,  this  was,  of  course,  the  most 
probably  impracticable  provision  of  the  bill.  Objection 
was  also  made  to  the  employment  of  so  large  a  portion  of 
specie  in  the  payment  of  duties,  on  the  ground  that  it  would 
embarrass  business ;  and  the  expensiveness  of  the  system 
was  held  up  as  a  further  reason  for  condemnation. 

However,  the  tide  had  turned,  the  ship  of  state  was 
being  guided  by  the  political  compeers  and  descendants 
of  Jackson  and  his  policy,  and  public  opinion  was  less  pro- 
nounced against  the  measure  than  it  had  been.  Thus  it 
happened  that  the  Sub-Treasury  was  re-established.  The 
bill  was  reported  by  the  Committee  of  Ways  and  Means, 
and  passed  the  House,  April  2,  1846,  by  a  vote  of  123  to 
67.  It  received  the  sanction  of  the  Senate,  on  the  1st  of 
August,  by  a  strict  party  vote  of  28  to  24,  and  went  into 
effect  immediately,  thus  consummating  the  policy  of  the 
"divorce  of  bank  and  State  "  which  was  begun  by  Jack- 
son and  carried  on  by  Van  Buren,  and  in  his  time  lasted 
"  just  long  enough  to  prostrate  the  party  which  brought  it 
into  being;  which  expired  with  the  elevation  of  the  op- 
posing party  —  was  revived  with  the  restoration  of  'the 
democracy,'  and  has  since  continued,  through  changes  of 


THE  STATE   BANKS  AS  DEPOSITORIES.  39 

administration,  undisturbed  ;  having  received  the  general 
acquiescence  of  the  popular  will,  if  not  the  positive  ap- 
proval of  the  public  judgment."  1 

And  so  the  "  divorce  "  of  bank  and  State,  which  had 
for  a  time  been  "  a  mensa  et  thoro"  now  became  "  a 
vinculo."  The  act  found  its  justification  in  the  nature  and 
condition  of  the  banking  system  of  the  time,  which  made 
the  reliance  of  the  government  on  the  banks  for  financial 
safety  dangerous  and,  therefore,  undesirable.  Under  the 
old  national  banking  system  the  issue  of  notes  was,  in- 
deed, fairly  well  under  government  control.  But  the 
character  of  that  system  was  unsuited  to  the  rapidly 
growing  needs  of  the  country,  and  threatened  a  social 
differentiation  incompatible  with  the  preservation  of  the 
democratic  equality  necessary  to  the  vitality  of  republican 
government.2  The  State  banking  system  had  been  well 
denominated  "  wild-cat."  Utterly  irresponsible,  and  be- 
yond control  in  the  strength  of  the  doctrine  of  State 
supremacy,  in  its  evil  and  untenable  form  which  was 
swept  away  only  by  the  blood  of  Civil  War,  these  banks 
were  indeed  a  veritable  powder  magazine  by  the  explo- 
sion of  which  the  credit  and  good  name  of  the  nation, 
if  it  trusted  them,  might  at  any  time  be  shattered. 

It  is  in  this  danger  that  we  must  look  for  the  justifi- 
cation of  the  removal  of  the  government  finances  to  a 
sounder  and  safer  basis.  Whatever  may  be  the  influence 
of  its  operation  now,  the  establishment  of  the  Sub-Treasury 
was,  under  the  circumstances,  justifiable  and  necessary. 
Whether  its  continuance  is  so  is  another  question,  the 
answer  to  which  it  remains  to  discover  from  the  history 
of  its  existence. 

1  Young's  "American  Statesman,"  p.  739. 

2  Cf.  Schurz's  "Henry  Clay"'  (American  Statesmen  Scries),  vol.  ii.,  pp. 
48-50 


40  THE  INDEPENDENT  TREASURY. 


CHAPTER    III. 

DEVELOPMENT    OF    THE    INDEPENDENT 
TREASURY. 

THUS  at  last  were  fully  realized  the  wishes  of  those 
who  had  worked  to  give  the  United  States  Treasury 
a  substantial  existence,  in  distinction  from  the  merely 
legal  life  which  it  had  hitherto  enjoyed.  The  first  sec- 
tion of  the  new  law1  defined  the  Treasury  thus:  "The 
rooms  prepared  and  provided  in  the  new  treasury  build- 
ing, at  the  seat  of  government,  for  the  use  of  the  Treas- 
urer of  the  United  States,  his  assistants  and  clerks,  and 
occupied  by  them,  and  also  the  fire-proof  vaults  and  safes 
erected  in  said  rooms  for  the  keeping  of  the  public  moneys 
in  the  possession  and  under  the  immediate  control  of  said 
Treasurer,  and  such  other  apartments  as  are  provided  for 
in  this  act  as  places  of  deposit  of  the  public  money,  are 
hereby  constituted,  and  declared  to  be,  the  Treasury  of 
the  United  States."  The  other  places  of  deposit  pro- 
vided for  were  Philadelphia,  New  Orleans,  New  York, 
Boston,  Charleston,  and  St.  Louis.  The  appointment  of 
assistant  treasurers  was  provided  for  in  the  last  four 
places,  while  in  the  other  two  the  treasurers  of  the  mints 
were  to  perform  the  duties  of  assistant  treasurers. 

The  sixth  section  contains  the  provisions  which  essen- 
tially modified  the  nature  of  the  Treasury.  It  provides 
"That   the  Treasurer  of  the  United  States,  the  treasurer 

1  The  act  is  given  in  full  in  Appendix,  p.  ii. 


DEVELOPMENT  OF  INDEPENDENT   TREASURY.   4 1 

of  the  mint  of  the  United  States,  the  treasurers,  and  those 
acting  as  such,  of  the  various  branch  mints,  all  collectors 
of  the  customs,  all  surveyors  of  the  customs  acting  also 
as  collectors,  all  assistant  treasurers,  all  receivers  of 
public  moneys  at  the  several  land  offices,  all  postmasters, 
and  all  public  officers  of  whatsoever  character  be,  and 
they  are  hereby,  required  to  keep  safely,  without  loaning, 
using,  depositing  in  banks,  or  exchanging  for  other  fundi 
than  as  allowed  by  this  act,  all  the  public  money  col- 
lected by  them,  or  otherwise  at  any  time  placed  in  their 
possession  and  custody,  till  the  same  is  ordered,  by  the 
proper  department  or  officer  of  the  government,  to  be 
transferred  or  paid  out ;  and  when  such  orders  for  trans- 
fer or  payment  are  received,  faithfully  and  promptly  to 
make  the  same  as  directed,  and  to  do  and  perform  all 
other  duties  as  fiscal  agents  of  the  government,  which 
may  be  imposed  by  this  or  any  other  acts  of  Congress,  or 
by  any  regulation  of  the  Treasury  Department  made  in 
conformity  to  law;  and  also  to  do  and  perform  all  acts  and 
duties  required  by  law,  or  by  direction  of  any  of  the  execu- 
tive departments  of  the  government,  as  agents  for  paying 
pensions,  or  for  making  any  other  disbursements  which 
either  of  the  heads  of  those  departments  may  be  required 
by  law  to  make,  and  which  are  of  a  character  to  be  made 
by  the  depositories  hereby  constituted,  consistently  with 
the  official  duties  imposed  on  them." 

Sections  seven  and  eight  provide  for  the  giving  of 
bonds;  nine  provides  for  deposits  by  collectors;  ten,  for 
transfers  by  the  Secretary  of  the  Treasury;  eleven  and 
twelve,  for  examinations  of  the  condition  of  the  Sub- 
Treasuries  and  depositories;  thirteen  provides  means, 
such  as  fire-proof  vaults,  etc.,  for  the  safe  keeping  of  the 
public  funds;  fourteen,  for  the  transfer  of  balances  from 


42  THE   INDEPENDENT  TREASURY. 

one  depository  to  another,  by  the  Secretary  of  the  Treas- 
ury; fifteen  directs  the  method  of  deposit  by  marshals, 
district  attorneys,  etc.  ;  sixteen  defines  and  provides  pen- 
alties for  embezzlement,  and  for  violations  of  the  act;  and 
seventeen  for  temporary  quarters.  Sections  eighteen  and 
nineteen  contain  the  provisions  around  which  the  con- 
flict of  debate  had  waged  most  fiercely.  In  them  occurs 
the  famous  specie  clause,  which  requires  the  payment  of 
public  dues  and  disbursements  in  gold  or  silver  coin  or 
treasury  notes  only.  The  specie  clause  was  not  to  go 
into  effect  until  the  ist  of  January,  1847.  Section 
twenty  supplements  the  two  previous  sections  by  requir- 
ing that  all  exchanges  of  funds  must  be  on  a  gold  and 
silver  basis.  The  mode  of  payment  of  drafts  is  prescribed 
by  the  twenty-first  section,  and  that  of  salaries  by  the 
twenty-second.  In  the  twenty-third,  and  final,  section, 
provision  is  made  for  immediate  incidental  expenses. 

From  this  brief  summary  it  is  clear  that  the  act  com- 
pletely accomplished  the  separation  of  bank  and  State,  at 
which  it  was  aimed.  It  made  the  government  distinc- 
tively its  own  banker,  essentially  and  actually,  even  to 
the  furnishing  of  the  paraphernalia  of  office-room.  Taken 
in  conjunction  with  the  law  sanctioning  the  emission  of 
treasury  notes,  the  sub-treasury  act  established  a  bank 
of  issue. 

The  providing  of  vaults  was  simply  a  result  of  that 
play  on  words  which,  after  all,  was  part  of  the  basis  of 
the  constitutional  argument.  There  was  no  sound  reason 
why,  even  though  the  government  financial  operations 
were  separated  from  the  banks,  the  public  money  might 
not  have  been  kept  in  bank  vaults,  perhaps  as  special 
deposits. 

The    places    selected   for   the    establishment    of    sub- 


DEVELOPMENT  OF  INDEPENDENT  TREASURY.   43 

treasuries  were  those  in  which  the  government  opera- 
tions were  most  considerable,  and  which  were  centres  for 
the  collection  of  revenue  from  the  country  round  about, 
and  for  the  payment  of  the  public  creditors.  The  estab- 
lishment of  a  Sub-Treasury  or  depository  in  a  place 
appears,  also,  to  have  been  regarded  as  peculiarly  advan- 
tageous from  a  business  point  of  view,  because  it  was 
thought  to  make  trade  brisker  through  the  concentration 
of  larger  amounts  of  money.  Of  course  this  supposition 
had  no  foundation  in  fact,  unless  in  the  case  of  a  place, 
if  there  were  any  such,  remote  from  a  bank  and  accus- 
tomed to  make  considerable  payments  to  a  hitherto  distant 
treasury  agency.  But  the  advantage  in  any  case  was 
merely  one  of  convenience,  and  was  not  due  to  any 
possible  fillip  to  the  briskness  of  trade.  That  such  a 
combination  of  circumstances  existed  is,  however,  too 
improbable  to  dwell  on.  As  a  matter  of  fact,  the  ground 
covered  by  the  new  Sub-Treasuries  and  depositories  was 
substantially  that  formerly  occupied  by  the  banks  through 
which  the  government  had  done  its  business.  The  selec- 
tion of  the  localities  was  made,  then,  not  on  political 
grounds,  but  solely  on  the  supposed  conditions  of  the 
public  service.  At  a  later  time,  the  feeling  that  the 
presence  of  a  Sub-Treasury  is  advantageous  to  business 
led  to  an  attempt  to  secure  the  establishment  of  one  in 
Louisville.  But  the  request  was,  as  we  shall  see,1  refused 
by  Congress. 

The  requirement  that  all  public  officers  should  safely 
keep  the  public  money  committed  to  their  charge  without 
depositing  it  in  banks,  was  as  absurd  as  it  was  unjust 
to  the  officers  and  unsafe  for  the  money.  For  no 
proper    places    for    safe-keeping   were     provided.       The 

1  See  p.  76. 


44  THE  INDEPENDENT  TREASURY. 

banks  had  vaults  far  safer  than  any  place  of  deposit 
that  could  be  provided  by  most  of  the  officers  of 
the  government,  in  the  lack  of  proper  appropriations. 
The  new  provision,  then,  made  the  public  money 
less,  rather  than  more,  safe,  so  far  as  fire  and  theft 
were  concerned.  Moreover,  it  was  unjust  to  throw  so 
great  a  responsibility  on  the  holders  of  the  public  money, 
without  furnishing  them  with  suitable  accommodations 
for  keeping  it.  To  be  sure,  section  thirteen  did  provide 
for  fire-proof  vaults,  and  section  seventeen  for  temporary 
quarters,  but  not  in  sufficient  number;  and,  besides,  they 
could  not  be  secured  for  some  time  to  come.  The  specie 
clause  was  a  return  to  the  provision  passed  by  the  first 
Congress,  that  the  Treasury  should  receive  only  coin  in 
payment  of  public  dues.  Of  this  clause  Edward  Everett 
said  that  "  if  the  attempt  could  be  forced  through,  it 
would  be  like  an  attempt  on  the  part  of  the  government 
to  make  use  of  the  ancient  modes  of  travel  and  convey- 
ance, while  every  citizen  in  his  private  affairs  enjoyed 
the  benefits  of  steam  navigation  and  railways."1  In  a 
certain  sense,  Everett  was  right;  but  the  remark  seems 
to  indicate  that  he  misconceived  the  whole  drift  of  the 
sub-treasury  act,  and  especially  of  the  specie  clause. 
As  Secretary  Walker  had  pointed  out,  the  act  without  the 
specie  clause  would  have  been  useless,  or  worse.  If  the 
government  were  to  be  no  longer  connected  with  banks, 
especially  in  the  way  of  having  no  control  over  their 
issues,  it  was  right  that  it  should  not  use  their  notes. 
The  only  other  way  whereby  it  could  provide  itself  with 
the  "steam  navigation  and  railways"  of  paper  money,  or 
the  aerial  "wagon-way,"  to  use  Adam  Smith's  better  fig- 
ure, was  to  issue  notes  of  its  own.      Every  lover  of  sound 

1  See  Bankers'  Magazine,  August,  1885. 


DEVELOPMENT  OF  INDEPEXDEXT  TREASURY.   45 

finance  must  always  fear  that  operation,  which,  under  the 
circumstances  existing  at  that  time,  would  have  caused 
untold  trouble  if  it  had  been  largely  resorted  to.  The 
only  alternative  was  the  use  of  specie,  and  to  that,  in  the 
main,  the  government  wisely  committed  itself.  The  clause 
was  not,  indeed  could  not  be,  observed  to  the  very  letter. 
Even  as  late  as  1855,  we  are  told,  it  was  little,  if  at  all, 
observed  by  postmasters.1  Yet  the  clause  was  produc- 
tive of  great  good,  notwithstanding  the  imperfect  manner 
in  which  the  law  was  executed.  "  All  receipts  from 
lands,  customs,  and  other  public  dues,  were  paid  in  gold 
and  silver  and  treasury  notes;  and  these  were  employed 
by  the  Treasurer  in  making  payments.  In  this  way  a 
stream  of  gold  and  silver  was  set  in  motion,  limited  in- 
deed, and  running  chiefly  from  the  public  depositories  to 
the  banks,  and  then  returning.  But  it  swelled  to  larger 
dimensions."-  In  short,  the  specie  clause,  although  it 
was  impeded  and  limited  in  its  operation,  was  wholly 
productive  of  good,  and  the  departure  from  it  under 
financial  stress  in  later  times  was  a  misfortune. 

So  far  as  the  banks  were  concerned  the  new  system 
meant  the  loss  of  the  government  deposits  from  their 
vaults,  with  the  consequence  of  lessened  discounts,  and 
the  withdrawal  of  the  support  of  government  credit  from 
their  notes.  The  banks  might  suffer  from  the  first  inci- 
dent, but  had  no  right  to  complain  of  it;  and  as  for  the 
second,  it  was  no  fault  of  the  government's  if  bank 
notes  could  not  be  kept  afloat  at  par  without  government 
support.  It  is  the  duty  of  a  bank  to  see  that  its  notes 
are  convertible,  at  par,  without  the  aid  of  the  public 
credit. 

1  Young's  "  American  Statesman,"  p.  874. 

2  Bolles's  "  Financial  History  of  the  United  States,"  1789-1S60.  p.  356. 


46  THE   INDEPENDENT  TREASURY. 

The  work  which  the  new  system  had  to  accomplish 
seemed  simple  enough,  consisting  as  it  did  merely 
of  the  receipt  and  payment  of  the  public  money.  It 
seemed  that  the  organization  of  such  a  system  should 
not  be  any  more  difficult  than  that  of  such  a  system  of 
branches  as  was  developed  under  the  second  United 
States  Bank.  Having  declared  its  purpose  to  pay  specie, 
however,  the  government  was  bound  to  do  so  at  every 
agency  however  remote  from  a  great  business  centre.  To 
refuse  to  do  so,  or  even  to  hesitate  or  to  delay,  was  to 
discredit  itself. 

The  new  system  began  its  career  under  many  difficul- 
ties. No  appropriation  was  made  for  the  salaries  of 
assistant  treasurers,  or  for  the  additional  salaries  of 
treasurers  of  the  mint  who  were  to  assume  new  duties 
under  the  law,  or  for  the  payment  of  any  special  exam- 
ining agents.  Neither  were  any  appropriations  made 
for  the  expense  of  transfers,  or  "  to  enable  disbursing 
agents  to  pay  the  public  creditors  at  all  times  and  places 
with  punctuality  and  despatch."  Moreover,  the  provision 
for  incidental  expenses  was  inadequate;  no  adequate 
security  was  provided  by  the  law  for  public  money  in  the 
hands  of  disbursing  agents,  and  the  powers  of  the  depart- 
ment as  to  the  method  of  making  payments  abroad,  were 
not  sufficiently  defined.  There  were,  in  addition,  certain 
external  difficulties  to  be  overcome.  Chief  among  these 
were  the  opposition  of  the  banks  and  the  distrust  and 
friction  incident  on  an  untried  system. 

On  the  25th  of  August,  1846,  Secretary  Walker  issued 
a  circular  to  collectors,  sub-treasurers,  and  other  officials, 
directing  them  to  make  all  government  drafts  payable 
to  order,  not  bearer.  The  drafts  were  to  be  transfer- 
able only  by  special   indorsement,  and   payable  only  at 


DEVELOPMENT  OF  INDEPENDENT  TREASURY,   tf 

designated  places.  If  a  draft  were  payable  at  a  place 
not  more  than  fifty  miles  from  Washington,  it  must  be 
presented  for  payment  within  twenty  days  from  the  date 
of  the  draft;  if  at  a  point  distant  between  fifty  and  one 
hundred  miles,  it  must  be  presented  within  forty  days; 
one  hundred  to  two  hundred  miles,  within  sixty  days; 
two  hundred  to  four  hundred  miles,  eighty  days;  and 
over  four  hundred  miles,  ninety  days.  All  drafts  not  so 
presented  had  to  be  sent  to  the  Treasurer  to  be  paid  as 
he  should  direct.  No  exchange  of  funds  between  dis- 
bursing officers  or  other  government  agents  was  allowed, 
except  for  gold  or  silver.  Under  the  specie  clause,  the 
Secretary  directed  that  no  payments  could  be  made  in 
treasury  drafts,  even  though  a  creditor  should  prefer 
that  mode  of  payment.  The  collectors  of  New  York  and 
Boston  were  required  to  deposit  their  receipts  daily, 
while  all  other  officers  mentioned  in  section  nine  of  the 
act  were  required  to  do  so  weekly.  During  the  next  two 
years  the  country  had  the  Mexican  war  on  its  hands,  and 
in  1847  tne  government  was  compelled  to  issue  over 
twenty  millions  of  treasury  notes,  and  to  contract  a 
twenty-eight  million  dollar  loan.1  But  the  notes  were 
issued  at  par,  and  the  bonds  commanded  a  premium. 
Throughout  the  war  specie  payments  were  kept  up,  the 
treasury  notes  at  no  time  falling  more  than  one-half  of 
one  per  cent,  below  par  in  New  York.  The  Secretary  in 
his  report  gives  the  Sub-Treasury  much  of  the  credit  for 
the  success  of  the  financial  operations  of  the  war.  "The 
Constitutional  Treasury,"  he  says,  ''has  been  tried  dur- 
ing a  period  of  war,  when  it  was  necessary  to  negotiate 
very  large  loans,  when  our  expenditures  were  being  in- 
creased and  when  transfers  unprecedented  in  amount  were 

1  Including  the  conversion  ot  treasury  notes. 


48  THE   INDEPENDENT   TREASURY. 

required  to  distant  points  for  disbursement.  During  the 
last  eleven  months  the  government  has  received,  trans- 
ferred, and  disbursed  more  specie  than  during  the  whole 
aggregate  period  of  fifty-seven  years  preceding  since  the 
adoption  of  the  Constitution."  Over  twenty -four  millions 
of  specie  were  imported  during  the  year,  a  net  gain  of 
imports  over  exports  of  more  than  twenty-two  millions. 
This  specie,  the  Secretary  maintained,  would  have  been 
made  the  basis  of  a  paper  inflation  which  would  have 
produced  a  ruinous  revulsion  in  business.  Gouge,  writing 
at  the  time,  took  the  same  view.  The  Secretary  wrote : 
"  From  this  revulsion  we  have  been  saved  by  the  consti- 
tutional Treasury,  by  which  the  specie  imported,  instead 
of  being  converted  into  bank  issues,  has  been  made  to 
circulate  directly,  to  a  great  extent,  as  a  currency  among 
the  people.  .  .  .  The  government  is  now  disconnected 
from  banks,  and  yet  its  stock  and  notes  are  at  par,  al- 
though we  have  been  constrained  to  contract  heavy  loans, 
and  to  keep  larger  armies  in  the  field  than  at  any  former 
period.  But  during  the  last  war,  when  the  government 
was  connected  with  banks,  its  six  per  cent,  stock  and 
treasury  notes  were  depreciated  twenty-five  per  cent., 
payable  in  bank  paper  twenty  per  cent,  below  par,  thus 
amounting  to  a  loss  of  forty-five  cents  in  every  dollar 
upon  the  operation  of  the  government."  Even  although 
Secretary  Walker's  view  of  the  beneficial  influence  of  the 
Independent  Treasury  be  regarded  as  too  favorable,  we 
may  readily  admit  that  the  credit  of  the  government  was 
upheld  largely  by  the  specie  clause  of  the  sub-treasury 
act,  which  virtually  bound  it  to  redeem  its  notes  and 
bonds  in  coin,  and  that  the  operation  of  the  act  was  to 
keep  up  a  specie  circulation  which  gave  a  sound  basis 
to  the  whole  currency. 


DEVELOPMENT  OF  INDEPENDENT   TREASURY.   49 

How  far  these  results  would  have  been  achieved, — 
and  how  far,  therefore,  they  were  due  to  the  Sub-Treas- 
ury, —  if,  while  the  government  was  under  the  stress  of 
the  war,  trade  had  not  assumed  a  tremendous  bound,  is, 
it  may  be  said,  at  least  problematical.  The  large  grain 
exports  of  1847,  amounting  to  over  $37,000,000,  brought 
in,  as  already  noted,  a  large  amount  of  specie;  the  aboli- 
tion of  the  corn  laws  in  Engand  was  attaining  its  full 
effect,  and  the  revolutionary  disturbances  in  Europe  in 
1848  also  tended  to  help  American  commerce.  The 
''favorable  balance  of  trade  "  was  paid  largely  in  imports 
of  specie,  partly  at  least  in  answer  to  the  government 
demand  for  it,  thus  enabling  that  demand  to  be  satisfied 
without  paying  too  great  a  price.  But  this  specie  remained 
in  the  country,  thus  showing  that  it  was  satisfying  a  last- 
ing need.  This  permanence  of  demand  was  doubtless 
largely  caused  by  the  demand  of  the  government.  If  the 
conditions  of  business  had  not  been  favorable  to  securing 
specie,  however,  it  is  not  unlikely  that  the  stress  which 
the  demand  for  specie  would  have  produced  would  have 
strained  the  financial  virtue  of  Congress  to  the  point  of 
breaking  or  annulling  the  act.  Consequently  the  Sub- 
Treasury  cannot  be  credited  with  the  whole  of  the  good 
influence  of  increasing  the  metallic  circulation.  The 
increase  was  largely  due  to  favorable  commercial  and 
financial  conditions.  Still,  the  independent  action  of  the 
government  had  a  beneficial  influence  on  the  currency  by 
restraining  bank  issues.  If  the  government  money  had 
been  deposited  in  the  banks,  as  the  banks  were  then 
conducted,  they  would  have  made  it  the  basis  of  further 
issues  of  notes,  forcing  up  prices  and  leading  to  an  export 
of  specie.  But  it  is  not  surprising  that  the  contrast 
between  government  finances  and   credit,  in  the  wars  of 


50  THE  INDEPENDENT   TREASURY. 

1812  and  of  1846,  should  have  reconciled  the  people  to 
the  new  system.  For  that  a  post  hoc  readily  becomes 
a  propter  hoc  in  the  popular  mind,  especially  in  the  finan- 
cial operations  of  a  government,  needs  no  proof  to  one 
who  knows  anything  of  the  popular  arguments  on  the 
subject,  for  example,  of  a  protective  tariff. 

One  small  advantage  of  the  system,  that  had  not  been 
foreseen,  was  reported  by  Secretary  Walker.  This  was 
in  the  fact  that  whereas  under  the  rigime  of  the  banks 
it  had  been  necessary  to  keep  four  millions  in  the  Treas- 
ury to  supply  the  mints  with  bullion  for  coinage,  under 
the  Sub-Treasury,  it  was  found  that  three  millions  would 
do. 

The  experience  of  the  first  two  years  developed  some 
defects  of  detail  in  the  system.  Secretary  Walker,  in  his 
report  for  1848,  speaks  of  losses  that  arose  from  delay  in 
shipping  foreign  coin  received  in  New  York  for  customs 
dues  to  Philadelphia  for  re-coinage,  and  therefore  he 
advocated  the  establishment  of  a  branch  mint  at  New 
York.  He  still  insisted,  however,  on  the  advantages  of 
the  independence  of  the  government  in  money  matters, 
asserting  that  "a  system  which  has  operated  so  benefi- 
cially, both  in  war  and  in  peace,  must,  in  the  main,  be 
wise  and  salutary." 

A  side  light  is  thrown  on  the  working  of  the  Sub- 
Treasury  system  in  a  speech  of  Webster's,  delivered  in 
Faneuil  Hall,  Boston,  Oct.  24,  1848.  He  asserted 
that  on  the  25th  of  the  previous  August  the  New  York 
banks  had  $5,800,000  in  specie,  and  the  New  York  Sub- 
Treasury  had  $1,400, 000.  On  Sept.  29,  the  banks  had 
but  $4,600,000,  and  the  Sub-Treasury  had  $2,400,000, 
thus  having  absorbed  one  million  of  dollars  in  a  single 
month,  with  the  evil  results  of  a  scarcity  of  money  and  a 


DEVELOPMENT  OF  INDEPENDENT   TREASURY.    5 1 

curtailment  of  discounts.  It  must  be  remembered,  how- 
ever, that  \Yebster  was  making  a  political  speech.  It  is 
not  at  all  probable  that  the  specie  lost  by  the  banks  was 
all  gained  by  the  Sub-Treasury.  Money  was  moving 
westward  at  that  season  of  the  year. 

In  the  following  year,  1849,  other  inconveniences  be- 
came manifest.  According  to  the  provisions  of  the  law, 
disbursing  officers  to  whom  drafts  were  issued  were  re- 
quired to  receive  the  whole  amount,  no  matter  how  large, 
in  one  sum,  even  although  they  had  to  use  it  in  making 
many  separate  small  payments.  Hence  the  custody  of 
the  money  and  the  burden  of  transferring  it  to  the  places 
where  it  was  due  were  forced  on  these  officers,  and  the 
money  was  thus  exposed  to  risk  of  loss  or  of  theft.  More- 
over, the  actual  carriage  of  coin  was  expensive  and  unsafe; 
there  was  great  inconvenience  from  the  accumulation  of 
coin  where  it  was  not  needed,  and  the  number  of  clerks 
employed  to  do  the  work  of  the  various  offices  was  too 
small.  On  account  of  these  disadvantages,  as  he  affirmed, 
the  new  Secretary  of  the  Treasury,  Mr.  Meredith,  ques- 
tioned the  expediency  of  continuing  the  system.  He 
proposed  that  any  person  having  a  draft  on  a  Sub-Treasury 
might  deposit  it  and  draw  on  the  deposit  as  he  needed 
the  money.  This  was  a  proposal  to  make  the  Treasury  a 
bank  of  deposit  for  the  safe  keeping  of  the  money  of  the 
government  creditors.  But  nothing  was  done  about  the 
recommendation,  even  with  reference  to  disbursing  agents, 
until  1857,  after  the  matter  had  been  repeatedly  urged  on 
the  attention  of  Congress.  Then,  however,  it  was  pro- 
vided that  disbursing  officers  might  draw  checks  on  the 
amounts  to  their  credit  in  favor  of  the  persons  to  whom 
money  was  due,  unless  the  amount  was  less  than  twenty 
dollars. 


52  THE  INDEPENDENT  TREASURY. 

As  to  the  transfer  of  the  public  funds,  obviously  one 
way  was  to  transfer  specie.  But  this  could  be  done  only 
at  great  expense  and  risk  and  loss  of  time.  A  second 
method  of  transfer  was  to  give  drafts  to  bankers  and 
brokers,  and  permit  them  to  use  the  money  long  enough 
to  compensate  them  for  the  expense  of  transporting  specie. 

When  Secretary  Guthrie  assumed  office  in  1853,  he  found 
that  "  $475,000  was  in  the  hands  of  agents  under  agree- 
ments to  transfer  the  same  for  the  department  to  different 
places  of  deposit,  together  with  the  sum  of  $2,226,982.27 
unaccounted  for  and  designed  to  pay  interest."1  The 
Secretary  abolished  this  method  of  making  transfers  and 
effected  them  "by  the  sale  of  treasury  drafts  at  the  points 
where  the  money  was  needed  for  disbursements,  as  author- 
ized by  law,  or  by  an  actual  transfer  by  an  officer  of  the 
department."2  Mr.  Guthrie  interpreted  the  Independent 
Treasury  law  strictly,  and  insisted  that  the  public  money 
should  always  be  in  the  Treasury  or  in  some  sub-treas- 
ury or  legal  depository.  He  required  the  assistant  treas- 
urers and  officers  of  depositories  to  receive  the  deposits 
of  disbursing  agents,  so  as  to  render  the  use  of  banks  by 
these  agents  unnecessary.  It  was  well  that  the  Secretary 
held  this  opinion  of  the  proper  method  of  making  trans- 
fers, for  the  use  of  bankers  and  brokers  as  agents  was  an 
exceedingly  vicious  makeshift.  It  opened  the  way  widely 
to  favoritism  towards  particular  banks,  and  was  a  source 
of  great  risk.  Some  of  the  drafts  were  not  accounted  for 
for  long  periods.  Moreover,  it  was  a  virtual  abandon- 
ment of  the  principle  of  the  complete  separation  from 
banks,  which  was  the  underlying  principle  of  the  Inde- 
pendent Treasury.  That  this  mode  of  transferring  funds 
was  much  abused  is  shown  by  the  increase  in  the  amount 

1  "  Report  on  the  Finances,"  1852-53,  p.  13.  -  Ibid. 


DEVELOPMEXT  OF  INDEPENDENT  TREASURY.    53 

of  transfers  when  the  method  was  used.  When  the 
transfers  were  made  in  cash  they  amounted,  in  New 
Orleans,  to  about  $38,000  a  month;  under  the  system 
of  employing  bankers  and  brokers  the  transfers"  swelled 
to  $227,000.  In  Washington  they  rose  from  $135,000  a 
month  to  $225,000.  This  evil  was  corrected,  however. 
in  1854,  and  the  transfers  were  thereafter  made  in  money. 
About  this  time  the  California  gold  mines  began  to 
have  an  influence  on  business  by  making  gold  a  commod- 
ity for  export.  The  excess  of  gold  exports  over  imports 
rose  from  a  little  less  than  three  millions  of  dollars  in 
1850  to  twenty-four  millions  in  1851,  thirty-seven  mil- 
lions in  1852,  and  became  thirty-four,  fifty-two,  forty-one, 
and  fifty-six  millions  respectively,  in  the  four  following 
years.  The  large  gold  production  must  have  had  a  ten- 
dency to  make  prices  more  irregular  than  they  would 
otherwise  have  been.  Their  trend  was  upwards,  and  on 
a  scale  approximately  adapted  to  the  amount  of  gold 
available  in  the  market.  The  action  of  the  Sub-Treasury 
was  a  disturbing  factor,  irregular  in  its  influence.  In 
1853  the  receipts  of  the  government  exceeded  its  expen- 
ditures, so  that  there  was  a  considerable  accumulation  of 
money  in  the  Treasury.  To  prevent  any  stringency  that 
might  be  caused  thereby  the  Secretary  issued  a  circular, 
on  the  30th  of  July,  offering  to  buy  five  million  dollars' 
worth  of  six  per  cent  bonds.  He  secured  them  by  paying 
a  premium  of  twenty-one  per  cent.  During  the  year 
1854,  according  to  the  report  of  Secretary  Guthrie,  the 
Treasury  kept  up  the  demand  for  coin  by  receiving  and 
paying  more  than  seventy-five  million  dollars  of  it. 
Thus  the  circulation  of  specie  was  maintained  despite 
the  tendency  exerted  by  the  small  notes  of  the  banks  to 
drive  it  out;  for  so  long  as  the  government   insisted  on 


54  THE  INDEPENDENT  TREASURY. 

using  specie,  it  could  not  be  wholly  driven  from  use.1 
The  Treasurer  stated  in  his  report  that  no  difficulty  had 
been  found  in  the  working  of  the  law,  and  that  the  money 
in  the  various  sub-treasuries  was  "  as  safe  and  secure 
as  that  in  the  Treasury."  Evidently  the  machinery  was 
now  in  good  running  order.  But  allowance  must  be 
made  for  official  prejudice  in  favor  of  the  system. 

In  May,  1854,  Mr.  William  M.  Gouge  was  appointed 
special  agent  to  examine  the  condition  of  the  various 
sub-treasuries  and  their  operations.  As  has  been  al- 
ready mentioned,  the  system  was,  at  the  time  of  its 
establishment,  under  great  disadvantages  from  the  lack 
of  suitable  buildings.  In  only  a  few  of  the  places  desig- 
nated as  the  seats  of  depositories  were  such  to  be  found. 
Gouge  reported  that  the  government  had  not  "  in  the 
whole  valley  of  the  Ohio  a  building  or  a  vault  in  which 
to  deposit  a  dollar  or  a  paper."2  Boston  was  the  only 
place  provided  with  suitable  buildings  for  the  Sub-Treas- 
ury. Most  of  the  buildings  actually  used  for  the  purpose 
were  unsuitable,  being  only  such  as  each  agent  could 
secure  under  his  special  circumstances,  so  that,  as  hith- 
erto, the  provisions  for  the  safe  keeping  of  the  public 
money  against  fire  and  burglars  were  totally  inadequate. 

1  This  fact  does  not  constitute  a  failure  of  Gresham's  law,  but  rather  is  in 
keeping  with  it ;  for  the  operation  of  a  special  force  —  the  uncompromising 
demand  of  the  government  for  coin — was  necessary  to  prevent  the  paper 
from  driving  out  the  gold.  Legislation,  or  custom,  or  public  opinion,  may 
exert  such  an  influence  as  to  maintain  an  existing  monetary  standard.  Gresh- 
am's  law,  like  other  economic  laws,  is  a  law  of  tendencies  :  and  a  statement 
of  it,  in  order  to  be  correct,  needs  to  be  conditional.  For  an  interesting  account 
of  a  similar  apparent  failure  of  the  law  see  the  article  by  Bernard  Moses  in  the 
Quarterly  Journal  of  Economics,  vol.  vii.  No.  i,  on  "  Legal  Tender  Notes 
in  California."'  In  this  case  the  gold  held  its  place  against  paper  backed  by 
the  fiat  of  government. 

2  Finance  Report,  1854,  p.  256. 


DEI  ELOPMENT  OF  INDEPENDENT   TREASURY.    55 

But  the  zeal  and  honesty  of  the  officials  made  up  for  these 
defects,  showing,  as  the  Secretary  pointed  out,  that  the 
objection  to  this  system,  founded  on  probable  loss  from 
the  personal  dishonesty  of  the  assistant  treasurers,  was 
unfounded.  Gouge  gives  a  description  of  one  deposi- 
tory visited  by  him,  which  is  worth  transcribing,  if  only 
to  show  the  niggardliness,  or  at  least  the  carelessness, 
of  Congress  in  providing  for  the  proper  carrying  out  of 
its  legislation,  and  also  the  notable  improvement  that 
has  since  taken  place.  The  depository  referred  to 
was  that  at  Jeffersonville,  Ind.  Gouge  says  that  it  re- 
minded him  more  strongly  of  what  Robinson  Crusoe's 
fortifications  may  be  supposed  to  have  been,  than  any- 
thing else  he  had  ever  seen.  "The  chief  tavern  of  the 
town  was  the  building  believed  to  afford  the  best  secu- 
rity, and  an  apartment  adjoining  the  bar-room  was  made 
a  depository  of  the  United  States.  Immediate  access 
from  the  bar-room  to  the  depository  was  shut  off  by  clos- 
ing the  door  of  communication,  and,  as  further  security, 
the  partition  wall  was  lined  with  boards;  but,  as  the 
glass  lights  in  the  communciating  door  were  left  uncov- 
ered, in  order  that  the  keeper  of  the  public  treasure  might, 
when  in  the  bar-room,  see  into  his  own  apartment,  a 
determined  burglar  could,  in  a  few  minutes,  have  forced 
his  way  in.  The  entrance  into  the  depository  was 
through  a  back  passage  under  a  stairway.  Every  person 
who  attempted  to  enter  had  to  stoop  till  he  was  almost 
double;  and  then  he  found  his  further  progress  obstructed 
by  a  grated  door,  fastened  by  an  iron  chain  in  such  away 
that  it  could  not  be  opened  except  by  main  force,  or  with 
the  consent  of  the  sub-treasurer.  When  in  the  deposi- 
tory the  citizen  who  had  business  there  found  it  divided 
into  two  apartments  by  a   temporary   partition.      One   of 


56  THE   INDEPENDENT    TREASURY. 

these  was  lighted  by  a  single  window,  defended  by  iron 
grates  of  no  very  great  strength.  In  this  division  of  the 
room  the  officer  kept  the  chief  part  of  his  silver  in  boxes; 
screening  the  boxes  themselves  as  well  as  he  could  from 
public  view  by  covering  them  with  wooden  casing  some- 
what resembling  in  form  a  giant  coffin.  In  the  other 
division  of  the  room,  being  that  to  which  there  was 
entrance  under  the  stairway,  there  was  an  iron  safe,  in 
which  the  depositary  kept  his  gold  and  so  much  silver  as 
he  could  store  therein.  Around  this  apartment  ran  a  low 
gallery,  constructed  by  the  depositary  expressly  that,  in 
case  of  attack,  he  might,  if  in  danger  of  being  overpow- 
ered below,  retire  above,  and  shower  down  upon  his 
assailants  stone  bottles  and  other  missiles  of  this  kind, 
of  which  he  had  provided  an  abundant  store.  He  slept 
in  this  room,  and  guns,  pistols,  and  pikes  completed  his 
assortment  of  weapons  offensive  and  defensive."  ] 

Gouge  recommended,  in  his  report,  that  the  actual 
transfers  of  specie  be  reduced  to  a  minimum  and  supple- 
mented by  the  use  of  drafts  on  some  specified  sub-treas- 
urer. These  drafts,  he  recommended,  should  be  issued 
at  any  sub-treasury,  on  deposit  of  the  amount  in  specie 
at  the  issuing  office.  This  mode  of  transfer  was  essen- 
tially adopted  afterwards.  The  object  of  making  these 
proposed  drafts  payable  at  a  particular  depository  was  to 
prevent  their  passing  from  hand  to  hand  as  currency.  For 
with  the  restriction  as  to  the  place  of  redemption,  if  they 
circulated  at  all  it  would  be  in  the  neighborhood  of  the 
sub-treasury  at  which  they  were  payable. 

Gouge  incorporated  in  his  report  a  resume  of  the 
advantages  of  the  Independent  Treasury  as  he  saw  them. 
He  insisted  that  it  gave  greater   stability  to   the   banks, 

l  See  Finance  Report,  1854. 


DEVELOPMENT  OF  INDEPENDENT  TREASURY.    57 

not  only  by  its  restrictive  influence  on  note  issues,  but 
also  by  keeping  specie  in  circulation.  For  the  banks  are 
sustained,  as  he  rightly  argued,  not  only  by  the  specie 
which  they  have  in  their  vaults,  but  also  by  all  in  the 
country  to  which  they  may  have  immediate  access  by 
the  sale  of  securities.  Gouge  further  maintained  that 
the  amount  of  specie  in  the  country  had  been  more  than 
doubled  by  the  action  of  the  Constitutional  Treasury 
system.  Summarizing  his  opinions,  he  declared  that  if 
the  Constitutional  Treasury  system  were  faithfully  carried 
out  it  would  increase  the  amount  of  gold  and  silver  in 
circulation,  weaken  the  force  of  bank  expansions  and 
contractions,  prevent  the  losses  that  had  formerly  arisen 
from  the  use  by  public  officers  of  public  funds  intrusted 
to  their  care,  give  the  government  at  all  times  complete 
control  of  its  own  funds,  prevent  the  derangement  of 
business  caused  by  government's  effecting  large  loans 
through  bank  credits,  and  tend  to  prevent  the  general 
suspension  of  specie  payments,  or  facilitate  their  restora- 
tion if  suspension  should  occur.  ''The  less  government 
has  to  do  with  banks,  and  the  less  banks  have  to  do  with 
government,  the  better  for  both."  That  doctrine  was 
eminently  sound  as  banks  were  then  constituted. 

It  may  fairly  be  admitted  that  experience  with  the 
Independent  Treasury,  up  to  the  time  when  Gouge  wrote, 
justified  him  in  the  first  four  opinions  mentioned  in  the 
summary  above,  gave  a  superficial  plausibility  to  the 
fifth,  and  showed  that  there  was  a  considerable  amount 
of  truth  in  the  last.  For  notwithstanding  its  many  im- 
perfections the  system  seems  to  have  been  at  this  time  in 
good  working  order,  and  was  apparently  accomplishing 
all  that  its  advocates  had  claimed  for  it.  But  since  its 
establishment  the  financial  operations  of  the  government 


5<S  THE   IXDEPENDENT  TREASURY. 

and  the  conditions  of  business  had  been  favorable  to  its 
success.  At  no  time  had  there  been  in  the  Treasury  any 
large  surplus,  and  there  had  been  no  crisis  to  cause  finan- 
cial distress.  To  be  sure  the  Mexican  war  caused  "a 
squeeze  "  in  the  market,  but  there  was  no  real  disturb- 
ance. Business  had  been,  on  the  whole,  good,  and  com- 
merce had  increased.  Consequently  there  was  little  to 
cause  friction  in  the  working  of  the  new  fiscal  ma- 
chinery. 

These  conditions  made  it  possible  for  the  Secretary  of 
the  Treasury  to  write  in  1855  that  the  Independent  Treas- 
ury was  '"  still  eminently  successful  "  in  all  its  operations. 
The  transfers  for  disbursement  for  the  fiscal  year  were 
$39,407,674,  made  at  a  cost  of  $19,762,  and  the  premi- 
ums on  the  sale  of  treasury  drafts  amounted  to  $30,431. 
The  government  was  now  engaged  in  the  business  of 
banking  and  exchange.  The  receipts  and  expenditures 
of  the  government  for  the  year  were  all  paid  in  gold  and 
silver,  and  were,  according  to  the  Secretary,  without  any 
perceptible  effect  on  currency  or  business.  This  last 
remark  was  an  implied  admission  of  the  possibility  of  an 
unfavorable  influence  of  the  Sub-Treasury  on  business. 

During  the  year  1854-55  the  vaults  at  Washington  had 
been  made  safe,  but  those  at  other  places  remained  in 
pretty  much  the  same  condition.  Gouge  again  made  an 
examination  of  them,  but  developed  nothing  new.  The 
only  loss  from  robbery,  he  says,  was  in  the  previous  year 
at  Pittsburg,  and  amounted  to  $10,000. 

The  system  of  transfer  drafts  recommended  by  Gouge 
the  year  before  had  been  adopted  and  had  worked  well. 
He  reported  that  further  experience  had  strengthened  his 
opinion  of  the  advantages  of  the  system. 

The  existence  of  a  surplus  was,  however,  evidently  a 


DEVELOPMENT  OF  INDEPENDENT  TREASURY.    59 

source  of  anxiety  to  the  well-wishers  of  the  Independent 
Treasury;  for  in  his  next  report,  December,  1856,  the 
Secretary  of  the  Treasury  takes  occasion  to  explain  its 
action  on  the  volume  of  money,  as  he  regards  it,  and 
attempts  to  show  that  the  influence  was  beneficent.  He 
declared  that  "the  Independent  Treasury,  when  over- 
trading takes  place,  gradually  fills  its  vaults,  withdraws 
the  deposits,  and,  pressing  the  banks,  the  merchants,  and 
the  dealers,  exercises  that  temperate  and  timely  control 
which  serves  to  secure  the  fortunes  of  individuals  and 
preserve  the  general  prosperity."  This  is  virtually  claim- 
ing that,  on  a  rising  market,  a  reduction  of  the  currency 
moderates  the  rise  of  prices,  preventing  them  from  reach- 
ing so  high  a  point  as  they  otherwise  would.  This  claim 
will  be  considered  by  and  by,1  but  meantime  it  is  suffi- 
cient to  note  that  the  system  was  even  already  on  the 
defensive.  Secretary  Guthrie  went  on  to  say  that  the 
Sub-Treasury  may  '"  exercise  a  fatal  control  over  the  cur- 
rency, the  banks,  and  the  trade  of  the  country,  and  will 
do  so  whenever  the  revenue  shall  greatly  exceed  the  ex- 
penditure." This  was  clear  to  the  Secretary  from  his 
own  experience  that  year.  There  was  a  surplus,  and 
prices  were  rising.  Therefore  the  Treasury  Department 
sought  to  give  relief  to  the  money  market  by  that  method 
of  forced  debt  payment  with  which  we  have  since  become 
so  familiar.  '"There  has  been  expended,  since  the  4th 
of  March,  1853,  more  than  $45,525,000  in  the  redemp- 
tion of  the  public  debt.  This  debt  has  been  presented, 
from  time  to  time,  as  the  money  accumulated  in  the 
National  Treasury  and  caused  stringency  in  the  money 
market.  If  there  had  been  no  public  debt,  and  no  means 
of  disbursing  this  large  sum  and  again  giving  it  to  the 

1  Chap,  vii.,  pp.  167,  211. 


60  THE  INDEPENDENT  TREASURY. 

channels  of  commerce,  the  accumulated  sum  would  have 
acted  fatally  on  the  banks  and  on  trade.  The  only  rem- 
edy would  have  been  a  reduction  of  the  revenue,  there 
being  no  demand  and  no  reason  for  increased  expendi- 
ture."1 

The  Secretary  asked  Congress  to  increase  the  number 
of  depositories,  so  as  to  afford  facilities  for  deposit  to 
all  receiving  and  disbursing  officers.  According  to  his 
report,  the  law  had  been  carried  out  as  far  as  practicable, 
but  some  disbursing  officers  had  ignored  that  part  of  it 
which  prohibited  deposits  in  banks. 

The  amount  of  transfers  during  the  year  had  amounted 
to  $38,088, 113.92,  at  a  cost  of  $12,945.87 ;  and  the  pre- 
miums on  the  sale  of  treasury  drafts  had  been  $54,924. 16; 
leaving  $41,978.29  over  the  expenses  of  transfer.  The 
Secretary  expressed  the  opinion  that  hereafter  the  trans- 
fers of  public  money  would  be  made  without  charge  and 
without  risk. 

In  1857,  by  an  act  of  March  3,  the  law  was  amended  so 
as  to  require  disbursing  officers  to  deposit  in  some  sub- 
treasury.  Up  to  this  time  many  of  them  had  continued 
to  use  the  banks  for  the  safe  keeping  of  the  public  money 
in  their  charge,  usually  placing  it  in  them  as  a  special 
deposit.  After  the  amendment,  the  Secretary  directed 
the  treasurers  of  the  mints,  of  the  depositories,  and  of 
the  sub-treasuries,  to  receive  deposits  of  disbursing 
officers,  but  not  to  honor  drafts  on  them  unless  made  in 
favor  of  some  person  known  to  the  treasurer.  If  for  sums 
of  $20  or  less  the  drafts  might  be  drawn  in  favor  of  the 
disbursing  officer  himself,  or  of  bearer.  Disbursing  offi- 
cers might  also  draw  for  money  to  pay  the  salaries  of 
employees,  but  they  were  required  to  furnish  lists  of  such 

1  Finance  Report,  1856,  p.  32. 


DEVELOPMENT  OE  INDEPENDENT  TREASURY.   6 1 

employees.  Public  depositaries  were  not  required  to 
pay  drafts  made  out  to  A.B.  or  order;  but  they  might 
pay  to  A.  B.  ox  bearer.  There  were  many  obvious  diffi- 
culties in  the  way  of  strictly  enforcing  the  amendment, 
and  it  is  probable  that  it  was  not  widely  observed  to  the 
letter.  The  treasury  report  of  1858  pointed  out,  what 
might  have  been  easily  foreseen,  that  there  were  some 
conditions  under  which  compliance  with  the  law  was 
utterly  impracticable.  Sailors  in  a  foreigr  port,  or  on 
a  long  cruise,  could  not  be  paid  according  to  the  law, 
and  pursers  must  carry  money  with  them.  Indian  agents 
could  not  pay  so,  neither  could  disbursing  officers  remote 
from  a  depository;  and  disbursing  agents  of  the  army 
would  have  some  difficulty.  Much  additional  labor  and 
expense  were  entailed  by  the  act  requiring  the  assistant 
treasurers  and  depositaries  to  hold  the  money  of  disburs- 
ing officers  and  pay  it  out  in  detail.  According  to  Sec- 
retary Cobb,  the  additional  labor  amounted  to  "one 
hundred  per  cent."  This  labor  increased  as  the  govern- 
ment revenues  grew,  and  assumed  enormous  proportions 
on  the  breaking  out  of  the  civil  war.  According  to  the 
report  of  1861,  the  amounts  so  deposited  rose  from  eight 
millions  to  one  hundred  and  ninety  millions  of  dollars. 

The  year  1857  witnessed  a  panic  in  the  money  market. 
As  the  pinch  grew  more  severe,  the  Secretary  of  the 
Treasury  sent  to  the  various  depositories  silver  change  of 
all  denominations,  and  small  gold  from  the  mint,  with 
instructions  to  pay  out  the  coin  to  applicants  in  exchange 
for  large  coin.  This  furnishing  of  "change''  was  a  real 
convenience,  and  it  could  not  but  have  had  a  good  edu- 
cational effect  by  keeping  specie  in  daily  use  among  the 
people. 

Speaking  of  the  amendment  requiring  disbursing  offi- 


62  THE   INDEPENDENT   TREASURE. 

cers  to  deposit  in  the  government  depositories,  Secretary 
Cobb  said:  "The  present  condition  of  money  affairs  is  a 
significant  indication  of  the  consequences  that  must  have 
been  anticipated  if  this  regulation  had  not  been  adopted, 
and  the  public  money  advanced  to  disbursing  officers  had 
continued  to  be  deposited  in  banks  and  with  bankers, 
and  had  been  used  by  them  as  a  basis  for  increasing  their 
business  and  extending  their  circulation.  Not  only  would 
the  contraction  now  going  on,  and  the  consequent  embar- 
rassment and  distress  of  the  commercial  community,  have 
been  much  greater  than  it  is,  but  the  public  moneys  them- 
selves would  have  been  placed  in  imminent  danger.'"  In 
fact,  the  situation  was  such  that  there  would  probably 
have  been  a  repetition  of  the  events  of  1837,  and  the 
"divorce  of  bank  and  state"  was  justified  by  the  danger 
which  it  had  evidently  enabled  the  government  to  avoid. 
In  1837  the  failure  of  the  banks  caused  the  government 
great  embarrassment.  In  1857  the  banks  had  again 
failed ;  but  the  government,  having  its  money  in  its  own 
hands,  was  able  to  pay  its  debts,  and  met  every  liability 
without  trouble.  Said  the  Secretary  of  the  Treasury  :  "It 
has  resorted  to  no  expedient  to  meet  the  claims  of  its 
creditors,  but  with  promptness  pays  each  one  upon  presen- 
tation." It  is  not  to  be  wondered  at  that  such  a  showing 
should  wed  the  people  to  the  system.  Its  practical  suc- 
cess in  preserving  the  credit  of  the  government,  or  at 
least  in  making  its  financial  operations  easier,  was  an 
object  lesson  that  appealed  to  the  popular  mind. 

Secretary  Cobb  claimed  that  the  specie  disbursements 
of  the  government  afforded  relief  to  the  money  market. 
This,  doubtless,  was  true.  Rut  it  could  hardly  be  used 
as  an  argument  to  show  the  benefits  of  the  Independent 
Treasury,   unless  it  were  also  shown    that    its    previous 


DEVELOPMENT  OF  INDEPENDENT  TREASURY.   63 

absorption  of  this  specie  did  not  bring  on  or  intensify 
the  monetary  pressure.  Certainly  it  could  not  now  be 
said  that  the  system  had  prevented  over-issue  by  the 
banks,  in  face  of  the  prostration  of  credit  that  had  over- 
taken them.  Thus  one  of  the  claims  of  which  most  was 
made  in  favor  of  the  "Constitutional  Treasury,"  that  it 
would  check  excessive  issues  of  bank-notes,  was  shown 
by  the  occurrences  of  1857  to  be  less  strong  than  had  been 
supposed.  Even  Mr.  Howell  Cobb,  the  Secretary  of  the 
Treasury,  ardent  supporter  as  he  was  of  the  policy,  was 
compelled  to  admit  that  the  anticipations  of  its  friends 
that  it  would  so  operate  were  true  only  "to  a  limited 
extent." 

Still  he  was  so  sure  of  the  beneficial  influence  in  this 
direction  of  the  independence  of  government  fiscal  opera- 
tions that  he  recommended  the  State  governments  to 
adopt  the  system.  Ohio  seems  to  have  been  the  only 
State  that  seriously  contemplated  doing  so,  but  the  act  to 
separate  the  State  finances  from  the  banks,  after  passing 
the  House,  was  voted  down  in  the  State  Senate. 

The  collection  and  disbursement  of  the  revenue  went 
on  during  the  panic,  according  to  the  Secretary,  without 
"loss  or  embarrassment,"  and  the  sub-treasury  system 
was '' eminently  successful."  There  was  no  loss  from 
faithless  officers,  the  expense  of  its  operation  was  small, 
and  it  had,  in  the  opinion  of  the  government  officers,  no 
bad  effect  on  business.  President  Buchanan  took  the 
same  view  as  his  Secretary  of  the  beneficial  operation 
of  the  Sub-Treasury.  In  his  annual  message,  Dec.  7, 
1857,  he  said,  "Thanks  to  the  Independent  Treasury, 
the  government  has  not  suspended  [specie]  payments,  as 
it  was  compelled  to  do  by  the  failure  of  the  banks  in 
1837.      It  will  continue  to  discharge  its  liabilities  to  the 


64  THE  INDEPENDENT  TREASURY. 

people  in  gold  and  silver.  Its  disbursements  in  coin 
pass  into  circulation  and  materially  assist  in  restoring  a 
sound  currency." 

During  the  financial  year  1858,  bond  purchases  were 
continued  to  the  amount  of  nearly  four  millions  of  dol- 
lars, and  contributed  somewhat  to  the  mitigation  of  the 
disasters  of  the  revulsion.  In  view,  however,  of  the  fact 
that  the  excess  of  exports  of  specie  over  imports  for  the 
year  amounted  to  over  thirty-three  million  dollars,  it  is 
clear  that  the  influence  of  the  amount  "set  free"  from 
the  Treasury,  on  the  whole  volume  of  the  currency,  must 
have  been  very  insignificant. 

After  the  country  recovered  from  the  effects  of  the 
panic  its  progress  was  very  rapid.  From  1858  to  1861 
the  country  was  prosperous,  and  th  2  banks  held  a  strong 
specie  reserve.  The  expenditure  of  the  government  for 
three  years  exceeded  the  receipts  by  about  ninety  mil- 
lions of  dollars,  and  the  deficit  was  met  by  loans.  Under 
an  act  of  Dec.  23,  1857,  over  fifty-two  million  dollars  of 
treasury  notes  were  issued.  They  were  redeemable  in 
one  year,  bore  interest  ranging  from  three  to  six  per 
cent,  and  were  sold  at  par.  In  June,  1858,  bonds  to  the 
amount  of  twenty  million  dollars,  redeemable  in  fifteen 
years,  were  sold  at  a  premium.  In  June,  i860,  came  seven 
millions  more,  which  also  sold  at  a  premium,  though 
a  smaller  one;  and  in  December  of  the  same  year  an 
issue  of  ten  million  dollars  of  treasury  notes  was  author- 
ized. They  sold  at  par.  The  needs  of  the  government 
under  the  stress  of  war  necessitated  the  placing  of  several 
more  loans,  both  in  bonds  and  treasury  notes,  all  of 
which,  with  one  exception,  were  placed  at,  or  above,  par. 
This  is  true  even  of  the  demand  notes  of  1861,  although 
it  was  only  with  some  difficulty  that  the  employees  of  the 


DEVELOPMENT  OF  IXDEPENDENT   TREASURY.   65 

government  were  persuaded  to  receive  them.  As  yet  the 
government  was  true  to  its  resolution  to  maintain  itself 
on  the  specie  basis  that  formed  the  keystone  of  the  inde- 
pendent treasury  system.  However,  under  the  act  of  July 
17,  1861,  Secretary  Chase  applied  to  the  banks  for  a  loan 
of  fifty  million  dollars  in  seven-thirty  bonds,  payable  in 
three  years.  The  loans  of  the  Mexican  war  had  been 
placed  independently  of  the  banks.  The  Treasury  had 
been  its  own  broker.  This  solicitation  of  aid  from  the 
banks  was,  therefore,  the  first  step  away  from  the  prin- 
ciple on  which  the  independent  treasury  system  had  been 
built.  It  was  a  little  step.  The  banks  were  not  yet 
to  handle  the  government  receipts  or  to  have  the  cus- 
tody of  its  money.  But  it  was  a  look  backward  to  the 
policy  abandoned  in  1846.  The  act,  however,  was  a 
necessity.  The  government  needed  gold,  and  the  only 
large  accumulated  stock  of  that  metal  was  in  the  banks. 
Their  specie  reserve  amounted  to  about  eighty-seven 
million  dollars,  and  they  were  strengthening  their  posi- 
tion. In  August  the  Secretary  had  a  conference  in  New 
York  with  representative  bankers  of  New  York,  Phila- 
delphia, and  Boston,  with  reference  to  the  requested 
loan.  The  terms  were  agreed  on,  as  mentioned ;  the 
government  was  provided  with  money,  which,  being  ex- 
pended in  military  operations,  found  its  way  back  to  the 
banks  and  enabled  them  to  make  a  further  advance  of 
a  similar  amount  soon  afterwards.  Between  August  19 
and  Nov.  19,  1861,  Secretary  Chase  borrowed  over  a 
hundred  and  forty  millions  of  dollars  from  the  banks. 
The  specie  held  by  them  in  August,  the  time  of  the  first 
loan,  was  forty-seven  millions  of  dollars  ;  in  December, 
after  most  of  the  last  loan  had  been  paid,  it  had  decreased 
only  by  about  five  millions.  The  recuperative  power  of 
the  banks  was  thus  clearly  shown. 


66  THE   INDEPEKDEXT    TREASURE?. 

But,  while  borrowing  the  gold  of  the  banks,  Mr.  Chase 
was  also  driving  their  notes  from  circulation  by  the  issue 
of  treasury  notes,  and  the  bank-notes  coming  in  for  re- 
demption created  a  new  drain  on  the  gold  reserves  of  the 
banks.  The  banks  could  furnish  the  Secretary  with  gold, 
or  they  could  sustain  the  credit  of  their  notes.  But  they 
could  hardly  be  expected  to  do  both.  Accordingly  they 
urged  the  Secretary  to  cease  the  issue  of  the  treasury  notes 
and  to  use  bank-notes.  The  government  refused  to  do  so, 
however,  and  in  December,  1861,  the  banks  suspended 
specie  payments.  Had  the  Secretary  withdrawn  the 
treasury  notes  and  accepted  the  bank  issues,  it  would 
have  been  a  departure  from  the  Independent  Treasury 
act,  so  far  as  it  prohibited  connection  with  banks.  But, 
in  all  probability,  the  banks  would  not  then  have  been 
compelled  to  suspend,  and  the  government  could  have 
kept  inviolate  the  spirit  of  the  specie  clause  of  that  same 
act.  In  avoiding  Scylla  Mr.  Chase  fell  into  Charybdis. 
That  the  banks  would  have  avoided  suspension  if  the 
government  had  accepted  their  notes  is,  of  course,  by  no 
means  certain.  It  is  possible,  perhaps  probable,  that  the 
"  briskness  of  business  "  caused  by  the  war  would  soon 
have  induced  the  banks  to  over-issue,  and  specie  payments 
would  have  been  suspended  just  the  same.  Certainly  the 
mere  acceptance  of  the  notes  by  the  government,  while  it 
would  have  greatly  strengthened  the  credit  of  the  banks, 
could  not  have  prevented  their  notes  from  depreciating, 
unless  at  the  same  time  the  government  could  have  con- 
trolled and  limited  their  issue. 

It  is  not,  indeed,  true  that  the  main  responsibility  for 
the  suspension  of  specie  payments  by  the  banks  can  fairly 
be  laid  on  the  Independent  Treasury,  for  the  banks  could 
have  refused  to  lend  to  the  government,  and  so  could  have 


DEVELOPMENT  OE  EXDEPENDENT  TREASURY.   6y 

kept  their  gold  for  the  redemption  of  their  notes  ;  but  if 
they  had  done  so,  treasury  notes  would  early  have  been 
issued,  in  even  greater  numbers  than  they  actually  were, 
and  they  would  inevitably  have  increased  beyond  the 
power  of  the  government  to  keep  them  at  par.  The  Inde- 
pendent Treasury  law  permitted  the  issue  of  treasury 
notes,  and  so  far  contributed  towards  the  tendency  to 
suspension.  But  the  real  force  making  for  suspension 
was  the  policy  of  Congress  and  the  Treasury  Department 
to  try  to  meet  the  expenses  of  the  war  by  loans  with  as 
slight  an  increase  of  taxation  as  possible.  The  treasury 
notes  contemplated  by  the  Independent  Treasury  law  were 
convertible,  and  to  be  issued  for  a  short  time.  The 
notes  of  the  war  period  evidently  violated  the  spirit  of 
the  law,  though  keeping  within  its  letter.  There  is  rea- 
son for  thinking,  however,  that  if  the  government  had 
used  bank-notes  instead  of  treasury  notes,  suspension 
could  have  been  postponed  and  perhaps  avoided. 

The  suspension  of  specie  payments  by  the  banks  was 
necessarily  followed,  and  that  within  a  week,  by  a  similar 
action  on  the  part  of  the  government.  On  Jan.  6,  1862, 
"  it  dishonored  its  own  promises  —  it  ceased  paying 
coin,"  and  gold  immediately  went  to  a  premium  of  two 
per  cent.  Of  the  two  evils,  acceptance  of  bank-notes  in 
payment  of  government  dues  and  the  suspension  of  specie 
payments,  the  first,  of  course,  was  infinitely  the  less. 
The  mistake  of  Secretary  Chase  was  in  thinking  he  could 
avoid  both.  It  is  easy  to  criticise  after  an  event,  with 
all  the  data  at  hand.  It  is  far  more  difficult  to  act 
under  the  stress  of  actual  circumstances.  Yet  it  does 
seem  that,  even  at  the  time,  the  possibility  of  getting  on 
without  legal-tender  notes  might  have  been  seen,  and  the 
country  kept  on  a  specie  basis. 


68  THE  INDEPENDENT  TREASURY. 

Thus  the  most  important  provision  of  the  Independent 
Treasury  act  of  1846  was  made  of  no  effect.  The  gov- 
ernment had  been  solicitous  about  keeping  the  public 
money  safe  from  banks  and  bankers  that  would  not,  or 
could  not,  redeem  their  notes;  but  it  turned  itself  to  the 
manufacture,  by  the  hundred  million,  of  "greenbacks," 
which,  by  a  legal-tender  fiat,  were  forced  on  creditors  in 
payment  of  the  hard-earned  dollars  they  had  loaned. 
From  this  time  on,  then,  certainly  until  the  resumption  of 
specie  payments,  the  sub-treasury  law  was  a  dead  letter. 
The  act  that  cancelled  it  deprived,  in  many  instances, 
one  of  the  parties  to  a  contract  of  the  protection  of  the 
laws  of  his  country;  it  was  passed  with  much  hesitation 
and  misgiving  by  the  Congress  responsible  for  it,  and  on 
the  recommendation  of  a  Secretary  of  the  Treasury  who 
afterwards,  as  Chief  Justice  of  the  Supreme  Court  of  his 
country,  pronounced  it  unconstitutional. 

Still,  the  abandonment  of  the  system  of  "divorce  of 
bank  and  state "  was  not  yet  complete.  The  Sub- 
Treasury  remained  in  form.  The  legal-tender  notes  were 
not  receivable  for  customs  dues  because  the  government 
had  to  have  some  specie,  and  there  was  now  no  way  of 
getting  it  as  a  current  receipt  except  by  making  these 
duties  payable  in  gold. 

We  read  nothing  more  in  the  treasury  reports  about  the 
sub-treasuries,  beyond  the  mere  official  reports  of  their 
transactions,  until  1863.  During  that  financial  year,  we 
are  told,  the  receipts  and  disbursements  of  the  assistant 
treasurers  at  San  Francisco  and  St.  Louis,  and  of  the 
designated  depositories,  especially  at  Baltimore,  Cin- 
cinnati, and  Louisville,  were  "large  beyond  precedent." 
Of  course,  this  simply  meant  that  government  financial 
matters  had,  in  the  conduct  of  the  war,  suddenly  leaped 


DEVELOPMENT  OF  INDEPENDENT  TREASURY.   69 

to  gigantic  proportions.  The  duties  of  the  officers,  the 
Secretary  assures  us,  were  well  performed.  Meantime 
the  plan  of  paying  government  dues  by  means  of  transfer 
checks  on  the  assistant  treasurers  at  New  York,  Phila- 
delphia, Boston,  and  San  Francisco  had  been  adopted, 
and  Treasurer  Spinner  informs  us  in  1863  that  the  plan 
had  proved  of  signal  "benefit  to  the  public  creditors,  and 
an  essential  aid  to  the  business  of  the  department."  The 
number  of  these  checks  had  increased  from  14S4  in  the 
financial  year  of  1861  to  30,526  in  1863.  In  the  latter 
year  $159,864,954  were  thus  transferred.  By  the  use  of 
these  the  necessity  for  the  actual  transfer  of  specie  was 
of  course  obviated. 

The  law  establishing  the  present  national  banking 
system,  passed  Feb.  25,  1863, x  took  two  more  steps 
away  from  the  act  of  1846.  The  first  was  that  which 
allowed  national  banks,  designated  by  the  Secretary  of 
the  Treasury,  to  be  depositories  of  public  moneys,  except 
receipts  from  customs,  under  regulations  to  be  prescribed 
by  the  Secretary  of  the  Treasury.  The  reasons  for  prohibit- 
ing the  deposit  of  customs  receipts  in  the  banks  were  that 
these  were  paid  in  coin,  which  the  government  needed, 
and  that  the  banks  had  suspended  specie  payments.  The 
banks  might  also,  by  this  law,  be  employed  as  the 
financial  agents  of  the  government.  They  were  required 
to  give  satisfactory  security  by  the  "deposit  of  United 
States  bonds  and  otherwise,  for  the  safe  keeping  and 
prompt  payment  of  the  public  money  deposited  with 
them."  Postmasters  in  offices  within  counties  having  no 
designated  depositories,  treasurers  of  mints,  or  assistant 
treasurers,  or  the  Treasurer  of  the  United  States,  might 
deposit  in  the  national  banks,  at   their  own   risk.     This 

1  Acts,  37th  Cong.,  3d  sess.,  chap.  58. 


/O  THE  INDEPENDENT  TREASURY. 

was  practically  a  reversal  of  the  act  of  seven  years  before, 
which  required  collecting  and  disbursing  officers  to  use 
the  government  depositories.  The  second  step  back- 
wards, under  the  national  banking  law,  consisted  in  giv- 
ing a  semi-legal-tender  character  to  the  notes  issued  by 
banks  formed  under  the  new  law.  These  notes  were  to 
be  received  at  par  in  all  parts  of  the  United  States  in  all 
payments  to  and  by  the  government,  except  customs  and 
interest  on  the  public  debt  respectively.1  Had  this  same 
use  of  the  bank-notes  been  legalized  two  years  before, 
Secretary  Chase's  hands  would  not  have  been  tied;  even 
the  shadow  of  excuse  for  suspension  would  have  been 
taken  from  the  banks,  the  "greenbacks  and  depreciation  ?' 
could  have  been  easily  avoided,  and  the  monetary  history 
of  the  past  thirty  years  would  doubtless  have  been  a 
brighter  record.  This  provision  of  law  was  a  complete 
withdrawal  from  the  position  of  1846. 

In  this  same  year,  1863,  to  avoid  the  inconvenience  of 
handling  the  specie  which  was  still  in  use  for  the  pay- 
ment of  duties  and  interest  on  the  public  debt,  the 
deposit  of  gold  coin  and  bullion  with  the  Treasurer  or 
Sub-Treasurers,  in  sums  of  not  less  than  twenty  dollars, 
was  authorized;  and  certificates  were  to  be  issued  for 
these,  in  denominations  of  not  less  than  twenty  dollars, 
and  corresponding  with  the  denominations  of  United 
States  notes.  The  metal  had  to  be  kept  for  the  redemp- 
tion of  the  certificates  which  were  used  in  the  payment  of 
interest  and  customs.  Thus  the  use  of  the  vaults  of  the 
government  was  given  free  of  charge  to  bankers,  brokers, 
and  bullion  dealers  for  the  storage  of  their  specie. 

The  suspension  of  specie  payments  had  thrown  gold 
on  the  market  as  a  commodity,  and  speculation  in  it  soon 

1  Section  20  of  the  Bank  Act  of  186-1. 


DEVELOPMENT  OF  INDEPENDENT   TREASURY.    71 

became  rife.  The  violent  fluctuations  in  the  value  of 
gold  "  reacted  upon  prices  and  turned  the  most  legitimate 
of  business  enterprises  into  a  kind  of  gambling."  The 
principal  causes  of  this  unfortunate  state  of  affairs  were 
bad  legislation  and  the  accumulation  of  gold  in  the 
Treasury.  The  payments  of  coin  received  for  customs 
dues  had  exceeded  the  payments  of  interest  on  the  public 
debt  until,  in  1864,  about  fifty  million  dollars  were  stored 
in  the  government  vaults.  To  relieve  the  situation  Con- 
gress authorized  the  Secretary  of  the  Treasury  to  sell  the 
surplus  gold  for  other  currency.  He  did  so  to  the  extent 
of  eleven  million  dollars,  but  the  effect  was  only  for  a 
clay.  The  fluctuations  of  the  value  of  the  metal  continued 
and  were  aggravated  by  the  alternate  accumulation  and 
sale  of  gold  by  the  government. 

By  1866  the  organization  of  national  banks  was  well 
under  way,  and  the  system  had  proved  a  great  conven- 
ience. The  Treasury  report  for  1866  says:  "The  employ- 
ment of  national  banks  as  depositories  of  public  moneys 
and  fiscal  agents  of  the  government  has  been  a  great  aid 
to  the  department  in  the  placing  of  loans,  and  especially 
to  this  office,  in  the  collection  of  the  revenues  of  the 
government.  They  have  within  the  three  years  ending 
with  the  month  of  September,  1866,  received  moneys  on 
deposit  to  the  credit  of  the  United  States  as  follows:  — 

On  subscription  to  U.  S.  stocks      ....     Si, 1 16,151, 2861 
On  account  of  internal  revenue      ....  599.936.712 

From  miscellaneous  sources 37>443»637 

Total  collections I'753>531>636 

"They  have  paid,  in  various  ways,  and  at  points  as 
directed  by  this  office,  and  without  expense  to  the  govern- 
ment, during  the  same  time,  $1,722,554,656." 

1  Cents  omitted. 


J2  THE   INDEPENDENT  TREASURY. 

Up  to  this  time  but  two  banks  failed  to  meet  all 
the  demands  of  the  government  upon  them.  During  the 
next  few  years  the  Sub-Treasury  remained  substantially 
the  same  in  its  influence  and  mode  of  operations,  the 
extent  of  the  latter  adapting  itself,  of  course,  to  the  needs 
of  government  business. 

So  close  was  now  the  connection  between  the  banks  and 
the  financial  operations  of  the  government  that  the  "di- 
vorce of  bank  and  state  "  could  no  longer  be  said  to  exist. 
Said  the  Commercial  and  Financial  Chronicle  of  April  4, 
1868:  "The  Treasury,  so  far  from  being  severed  from  the 
banks,  may  now  at  certain  critical  periods  possess  great 
influence  over  them,  and  has  had,  for  some  weeks  past, 
almost  despotic  control  over  them,  because  it  could  at  any 
time  take  away  their  legal-tender  reserves  by  sales  of  gold, 
by  sales  of  bonds,  or  by  drawing  down  the  balances  in  the 
national  bank  depositories." 

In  1873  the  government  undertook  virtually  to  perform 
the  office  of  safe-depository  for  the  banks  by  allowing 
them  to  deposit  legal-tender  notes,  and  received  in  ex- 
change certificates  of  deposit  prepared  at  the  expense  of 
the  government.  The  deposits  were  withdrawable  on 
demand.  This  meant  that  the  banks  could  use  the  Sub- 
Treasury  to  keep  them  inTiotes  of  convenient  denomina- 
tions at  public  expense. 

The  banking  work  of  the  Treasury  received  an  addi- 
tional impulse  in  this  year  by  the  reissue  of  legal-tender 
notes  that  had  been  once  paid,  but  which  Secretary  Bout- 
well  brilliantly  regarded  as  a  "reserve  "  which  he  could 
put  out  again  to  increase  the  currency  and  so  relieve  a 
stringency.  This  was,  however,  but  a  trifling  interfer- 
ence with  business  relations  compared  with  others  that 
had  been  made  since  the  day  when  the  country  had  cut 


DEVELOPMENT  OF  INDEPENDENT  TREASURY.   73 

loose  from  the  safe  moorings  of  specie  payments  to  which 
she  had  been  determinately  tied  in  1846.  In  1873  came 
the  panic,  and  the  scarcity  of  money  was  severely  felt. 
Had  the  country  been  on  a  specie  basis  the  distress  would 
probably  have  been  much  less,  perhaps  scarcely  felt.  For 
fifty  million  dollars  of  gold  lay  in  the  vaults  of  the  Treas- 
ury and  sub-treasuries,  but  could  not  be  used  to  relieve 
the  situation  because  the  specie  was  not  wanted  to  pay 
private  debts;  for  its  use  would  have  entailed  a  sacri- 
fice equal  to  the  amount  of  the  premium  on  gold.  Secre- 
tary Boutwell's  "reserve"  was  brought  into  requisition 
again.  In  October,  Secretary  Richardson  thought  to 
afford  some  relief  by  instructing  the  sub-treasury  officers 
to  pay  out  silver  coin  to  public  creditors  who  wished  it, 
in  sums  not  exceeding  five  dollars  in  any  one  payment. 
But  the  Treasury  held  too  few  small  coins  to  make  an  im- 
pression of  any  importance  on  the  situation  by  such  a 
step. 

In  June,  1878,  the  Secretary  of  the  Treasury  was  author- 
ized to  make  any  mint  superintendent,  or  the  assayer  of 
any  assay  office,  an  assistant  treasurer  to  receive  gold  coin 
or  bullion  on  deposit. 

The  next  part  of  any  importance  played  by  the  Sub- 
Treasury  system  was  at  the  time  of  the  resumption  of 
specie  payments  in  1879.  Secretary  Sherman  decided  to 
pay  interest  in  coin  at  the  New  York  sub-treasury  only. 
Other  sub-treasury  officers  were  to  pay  interest  to  all 
who  would  accept  legal-tender  notes.  The  sub-treasury 
at  New  York  also  became  at  this  time  a  member  of  the 
clearing  house,  "to  a  certain  extent  and  for  certain 
purposes."  The  government  agreed  to  collect  its  checks 
through  the  clearing  house,  and  the  latter  to  receive  the 
balances  due  it  at  the  counter  of  the  sub-treasury,  and 


74  THE  INDEPENDENT  TREASURY. 

to  accept  legal-tender  notes  in  payment  of  all  government 
drafts.  Thus  the  connection  of  the  government  with  the 
banks  became  closer  than  ever.  As  the  notes  to  be 
redeemed  were  government  notes,  the  gold  necessary  for 
purposes  of  resumption  was  accumulated  in  the  Treasury 
vaults  and  not  in  the  banks.  But  resumption  could  prob- 
ably not  have  been  successful  without  the  aid  of  the 
banks.  The  banks  of  New  York  City  alone  held  forty 
million  dollars  of  the  government  paper,  and  the  presen- 
tation of  these  would  have  doubtless  shipwrecked  the 
Treasury  plans.  But  the  banks  held  them  back,  thus 
strengthening  the  government  credit.  Moreover,  as  far 
the  largest  part  of  the  drafts  on  the  sub-treasury  passed 
through  the  clearing  house,  and  as  that  organization  had 
agreed  not  to  call  for  specie,  the  actual  demand  for  coin 
payments,  when  resumption  began,  was  very  small. 

The  independence  of  the  government  in  financial  opera- 
tions could  not  well  have  been  maintained  under  the 
financial  conditions  into  which  the  nation  drifted  during 
the  war.  In  fact,  the  national  banks  were  avowedly 
created  for  the  purpose  of  aiding  the  government,  and 
their  very  establishment  was  thus  an  abandonment  of  the 
principle  of  the  sub-treasury  act  of  1846.  Whether  it 
would  have  been  possible  to  get  on  during  the  war  with- 
out the  aid  of  the  banks  in  the  placing  of  loans,  even  if 
the  government  finances  had  been  differently  conducted, 
is  a  question  the  correct  answer  to  which  could  hardly 
be  given  in  the  affirmative. 

But  it  was  not  only  in  loaning  to  the  government,  and 
in  aiding  resumption,  that  the  banks  rendered  valuable 
services.  The  refunding  operations  that  have  from  time 
to  time  taken  place  would  have  been  at  least  exceedingly 
difficult  without   their   aid.     The  amount  of   labor  and 


DEVELOPMENT  OF  INDEPENDENT  TREASURY.    7$ 

expense  which  they  saved  the  government  in  these  was 
very  great.  But  for  the  use  of  the  banks  as  deposi- 
tories the  money  paid  for  the  bonds  sold  "  would  neces- 
sarily have  been  placed  in  the  Sub-Treasury  to  await 
the  maturity  of  the  bonds  called  under  the  three  months' 
notice  required  by  law."  i  At  the  end  of  April,  1879,  the 
banks  had  sold  $389,944, 295  worth  of  bonds,  which  sum 
would  otherwise  have  gone  into  the  Sub-Treasury  vaults 
to  be  paid  out  only  as  the  called  bonds  matured.  Thus 
more  than  one-half  the  paper  circulation  of  the  country 
would  have  been  withdrawn  from  use,  and  the  results 
would  have  been  disastrous. 

The  extent  of  the  use  of  national  banks  by  the  govern- 
ment since  the  time  of  resumption  has  varied  largely, 
according  to  the  views  of  the  administration.  Before 
that  time  it  was  mainly  dependent  on  the  amount  of  the 
government  fiscal  operations.  In  1866,  as  already  related, 
the  banks  collected  for  the  government  over  a  billion  and 
a  half  of  dollars,  and  paid  out  a  nearly  equal  amount.  In 
the  following  year  they  held  government  deposits  to  the 
extent  of  twenty-six  millions,  more  than  was  similarly 
held  by  all  the  sub-treasuries  and  other  depositories  in 
the  country,  leaving  out  that  of  New  York.  In  the  years 
following  1870  the  number  of  banks  used  by  the  govern- 
ment, and  their  receipts  and  balances  of  public  money, 
were  as  follows:  — 


FISCAL   YEAR. 

NO.  OF   BANKS. 

RECEIPTS. 

BALANCE. 

187O 

148 

$120,084,041 

$8,483,549 

187I 

159 

99.299,840 

7,197.015 

1872 

163 

106,104,855 

7.777,873 

1873 

158 

169,602,743 

62,185,153 

1874 

154 

91,108,846 

7,790,292 

1  Proc.  Amer.  Bankers'  Assoc,  iJ 


y6  THE  INDEPENDENT  TREASURY. 


FISCAL  YEAR. 

NO.  OF  BANKS. 

RECEIPTS. 

BALANCE. 

1875 

145 

98,228,249 

11,914,004 

1876 

143 

97,402,227 

7,870.920 

1877 

145 

106,470,261 

7,555.776 

1878 

124 

99,781,053 

6,937.9!  6 

1879 

127 

109.397,525 

7,183,403 

1880 

131 

"9,493>I7i 

7,999,953 

l88l 

130 

131,820,002 

8,933,55o 

1882 

134 

143,261,541 

9,610,432 

1883 

I40 

145,974,256 

10,030,698 

1884 

135 

129,100,449 

10,716,144 

1885 

132 

119,056,058 

10,985,141 

1886 

l6o 

135,592,221 

14,036,632 

1887 

200 

128,482,769 

19,190,076 

1888 

29O 

132.591,946 

54,913,489 

1889 

270 

139,316,214 

43-305,511 

1890 

205 

147,761,566 

26,994,464 

1891 

185 

i52,389,837 

22,900,329 

In  his  report  for  1885  Treasurer  Jordan  said  that  "a 
more  extended  use  of  the  banks  as  depositories  would 
result  in  a  large  saving  to  the  government,  and  very 
much  lessen  the  chances  of  loss  from  peculation  and 
frauds  in  the  conduct  of  the  operations  of  the  Treasury." 

In  1880  an  effort  was  made  to  secure  the  establishment 
of  a  sub-treasury  at  Louisville,  Ky.  The  petition  was 
refused,  the  Finance  Committee  of  the  Senate  pointing 
out  that  the  only  advantage  that  the  establishment  would 
bring  to  Louisville  would  be  to  save  its  people  the 
expense  of  carrying  coin  to  the  nearest  sub-treasury  for 
redemption  and  exchange,  and  that  it  would  be  cheaper 
for  the  government  to  pay  express  charges  on  all  these 
shipments  than  it  would  be  to  maintain  a  sub-treasury. 
The  committee  also  said  :  "The  public  revenues  are  now 
collected  and  disbursements  made  outside  the  sub- 
treasury  cities,  with  absolute  security  to  the  government, 
through  more  than  one  hundred  and  sixty  national  bank 


DEVELOPMENT  OF  INDEPENDENT  TREASURY.    7 "J 

depositories."  In  a  letter  on  this  matter  to  Mr.  Mor- 
rison, of  the  Ways  and  Means  Committee,  Treasurer 
Jordan  wrote  that  at  least  five  of  the  existing  sub-treasu- 
ries could  be  dispensed  with,  and  their  functions  be  per- 
formed by  the  banks  with  greater  economy  and  less 
risk.  The  offices  he  designated  as  useless  were  those 
at  St.  Louis,  Baltimore,  Cincinnati,  New  Orleans,  and 
Chicago. 

In  1879,  as  we  have  seen,  the  New  York  sub-treasury 
became  a  member  of  the  clearing-house.  Soon  after,  the 
associated  banks *  decided  not  to  receive  silver  dollars 
issued  under  the  Bland  law,  except  on  special  deposit. 
In  1882  Congress  passed  a  law  in  the  interest  of  silver 
money,  which  made  it  illegal  for  any  national  bank  to 
belong  to  a  clearing-house  association  that  observed  such 
a  rule.  The  rule  of  the  banks  was  withdrawn  to  avoid 
the  law,  but  the  banks  adhered  to  their  policy  in  practice, 
and  the  Sub-Treasury  still  continues  a  member  of  the 
clearing-house.  The  banks  have,  however,  shown  more 
willingness  to  accept  the  coin  notes  issued  under  the  law 
of  July  14,  1890. 

The  advisability  of  a  more  extended  use  of  the  national 
banks  for  fiscal  purpose,  perhaps  their  complete  substitu- 
tion for  the  Sub-Treasury  system,  is  a  topic  that  can  be 
more  properly  treated  when  examining  the  influence  and 
working  of  the  Sub-Treasury.  The  opinions  of  the  va- 
rious Secretaries  of  the  Treasury  as  to  the  advantages 
of  the  existing  system  have  been  widely  different.  Secre- 
tary Sherman,  in  18S0,  wrote  that  "under  the  existing 
system  by  which  the  government  practically  holds  and 
disburses  its  own  money,  and  that  of  its  officers,  the  fiscal 
operations  are  conducted  without  disturbance,  embarrass- 

l  The  members  of  the  clearing-house. 


78  THE  INDEPENDENT  TREASURY. 

ment,  or  favoritism,  and  with  satisfaction  to  all  con- 
cerned." Still,  he  acknowledged  the  utility  of  the  banks. 
It  was  under  Mr.  Cleveland's  administration,  however, 
that  the  most  extended  use  of  banks  was  made.  In  the 
report  on  the  petition  for  a  sub-treasury  at  Louisville, 
already  mentioned,  the  Finance  Committee  agreed  with 
Treasurer  Jordan  in  asserting  that  a  reduction  of  the 
number  of  sub-treasuries  could  be  advantageously  made. 

In  1885  the  intimate  connection  of  the  government  with 
the  banks  was  shown  very  emphatically  by  the  reliance 
of  the  Treasury  on  the  banks  to  extricate  it  from  the 
difficulty  into  which  it  was  brought  by  the  reduction  of 
its  gold  reserve. 

Silver  certificates  had  accummulated  at  money  centres 
on  account  of  the  dulness  of  business,  and  were  largely 
used  in  payments  to  the  government.  So  fast  did  they 
come  in  that  anxiety  was  caused  as  to  the  ability  of  the 
government  to  maintain  gold  payments.  In  March  the 
New  York  clearing-house,  in  order  to  relieve  the  Treas- 
ury, offered  to  receive  silver  certificates  in  part  settlement 
of  government  balances  due  it.  But  even  this  was  not 
sufficient.  By  the  last  of  May  the  government  holdings 
of  gold  had  sunk  to  $115,810,533,  including  the  green- 
back reserve  of  $100,000,000.  In  July  the  banks  of  New 
York  agreed  to  purchase  from  the  government  from  ten  to 
twenty  million  dollars'  worth  of  subsidiary  silver,  and 
to  pay  for  it  at  par  in  gold.  The  difficulty  passed  away 
after  five  millions  of  gold  had  been  advanced  to  the 
government.1 

1  The  transaction  was  really  a  loan  of  gold  by  the  banks  to  the  govern- 
ment, with  the  subsidiary  silver  as  security,  rather  than  a  sale  ;  and  the  banks 
soon  afterwards  got  back  their  gold.  There  is  some  doubt  as  to  whether  the 
transaction  was  really  necessary,  for  gold  began  very  soon  to  flow  into  the 
treasury.     For  an  excellent  account  of  the  difficulty  and  the  means  whereby  it 


DEVELOPMENT  OF  INDEPENDENT  TREASURY.    79 

In  1886  Mr.  Jordan  again  declared  that  the  arrange- 
ments for  collecting  and  disbursing  the  revenue  were 
defective,  and  recommended  a  larger  use  of  the  national 
banks. 

A  bill  was  introduced  !  in  the  House  of  Representatives 
to  reduce  the  amount  of  bonds  required  from  national 
bank  depositories  and  so  restore  to  the  channels  of  busi- 
ness the  excessive  accumulations  of  money  in  the  Treas- 
ury. The  bill  was  never  acted  on,  and  nothing  came  of 
Mr.  Jordan's  suggestion. 

In  pursuance,  however,  of  this  idea  of  a  larger  use  of 
national  bank  depositories,  which  animated  the  Treasury 
management  under  Mr.  Cleveland,  the  government  depos- 
its in  banks  were  allowed  to  increase.  On  Jan.  1,  1887, 
they  were  about  twenty  million  dollars.  In  December 
the  amount  was  $52,199,917,  and  in  April,  1888,  it  had 
become  $61,921,294.  The  purpose,  of  course,  was  to 
restore  to  circulation  the  money  taken  therefrom  in  taxa- 
tion by  the  government  and  locked  up  in  the  vaults  of 
the  sub-treasuries,  on  the  ground  that  its  withdrawal 
contracted  the  currency  and  so  caused  distress.  The  policy 
was  reversed,  however,  by  Mr.  Windom  when  he  became 
Secretary  of  the  Treasury.  In  his  report  for  the  fiscal 
year  1889  he  condemns  the  use  of  the  banks  except  for 
the  deposit  of  such  sums  as  are  necessary  for  the  business 
transactions  of  the  government.  Under  his  management 
the  bank  deposits  were  reduced  by  October,  1889,  to 
$47,495,479,  and  he  declared  his  intention  of  making  a 
further  reduction  of  thirty  million  dollars.  "  The  national 
bank  depositories  have  been,  and  are,"  he  says,  "useful 

was  tided  over,  see  Taussig's  "  The  Silver  Situation  in  the  United  States," 
Public,  of  the  Amer.  Econ.  Assoc,  vol.  vii.  no.  1,  pp.  30-37. 
1  Dec.  20,  1886  ;  H.  R.  Bill  No.  10,324,  49th  Cong.,  2d  sess. 


80  THE   INDEPENDENT   TREASURY. 

auxiliaries  to  the  Sub-Treasury  system,  but  the  deposit  of 
public  funds  therewith  to  an  amount  largely  in  excess  of 
the  needs  of  the  public  service  is  wholly  unjustifiable. 
Such  a  policy  is  contrary  to  the  spirit  of  the  act  of  Aug. 
6,  1846,  which  contemplates  a  Sub-Treasury  independent 
of  the  banks."  Whether  or  not  Mr.  Windom's  opinion 
of  the  benefits  of  the  Sub-Treasury  is  correct,  he  was  cer- 
tainly justified  in  his  wish  and  endeavor  to  observe  the 
law.  His  objections  to  the  use  of  banks  will  receive 
due  consideration  in  another  chapter. 

Through  all  these  years  there  occurred  only  two  in- 
stances of  loss  to  the  government  from  the  use  of  national 
bank  depositories.  Treasurer  Hyatt  wrote  in  1887  :x 
"The  only  losses  suffered  by  the  government  on  this  ac- 
count, since  the  present  system  was  adopted,  occurred 
over  twenty  years  ago.  Under  the  present  method  of 
Treasury  supervision  it  is  hardly  possible  for  any  losses 
to  occur. 

"The  early  losses  to  the  government  were  caused  by  the 
failure  of  two  banks,  one  in  1863  and  one  in  1864. 2  These 
losses  have  been  more  than  counterbalanced  by  the  bene- 
fit derived  from  the  increased  conveniences  for  collecting 
and  disbursing  the  revenues  of  the  government,  without 
incurring  any  expense  for  transportation  of  funds  to  places 
where  money  was  needed  for  the  payment  of  its  cred- 
itors." 

An  account  of  the  operations  of  the  Independent  Treas- 
ury system  during  the  past  ten  or  twelve  years  might 
properly  be  given  here.  But  it  has  operated  since  the 
time  of  resumption  under  conditions  entirely  different 
from  those  existing  before,  so  that  its  history  during  the 

1  See  his  report  for  that  year,  p.  27. 

2  See  the  Finance  Reports  for  these  years. 


DEVELOPMENT  OF  INDEPENDENT  TREASURY.    8 1 

late  years  is  the  history  of  its  influences  rather  than  of  its 
further  development,  and  can  be  more  fittingly  and  satis- 
factorily traced  in  the  discussion  of  these,  with  a  view  to 
determining  whether  they  are  good  or  evil.  That  will  be 
our  effort  in  succeeding  chapters. 


82  THE  INDEPENDENT  TREASURY. 


CHAPTER   IV. 

THE    ORGANIZATION    AND  WORK    OF   THE    IN- 
DEPENDENT   TREASURY. 

THE  Independent  Treasury,  as  at  present  organized, 
consists  of  the  Treasury  offices  at  Washington,  nine 
sub-treasuries  under  the  charge  of  assistant  treasurers, 
and  a  varying  number  of  designated  depositories. 

The  supervision  of  the  Independent  Treasury  comes 
under  the  charge  of  the  chief  of  the  division  of  pub- 
lic moneys  in  the  Treasury  Department.  Among  other 
duties,  according  to  the  rules  of  the  Treasury,  that 
department  must  perform  the  following:  — 

"The  supervision  of  the  several  Independent  Treasury 
offices,  the  designation  of  national  bank  and  other  depos- 
itories, and  the  obtaining  from  them  of  proper  securities. 

"  The  directing  of  all  public  officers,  except  postmasters, 
as  to  the  deposit  of  the  public  moneys  collected  by 
them. 

"The  issue  and  enforcement  of  regulations  governing 
Independent  Treasury  officers,  and  the  several  deposito- 
ries and  public  disbursing  officers,  in  the  safe  keeping 
and  disbursement  of  public  moneys  intrusted  to  them. 

"The  direction  for  special  transfers  of  public  moneys; 
and  generally  all  matters  pertaining  to  the  foregoing."  1 

The    places    at  which   sub-treasuries   are    at    present 

1  From  pamphlet  on  "  The  Organization  of  the  Office  of  the  Secretary  of 
the  Treasury,"  pub.  by  Treas.  Dep't.,  July,  1S84. 


ITS  ORGANIZATION  AND    WORK. 


83 


located  are  Baltimore,  Boston,  Chicago,  Cincinnati,  New 
Orleans,  New  York,  Philadelphia,  San  Francisco,  and 
St.  Louis.  The  relative  importance  of  each  is  shown  by 
the  amount  of  business  done  for  the  fiscal  year  189 1 :  — 


Baltimore  . 
Boston  .  . 
Chicago  .  . 
Cincinnati  . 
New  Orleans 
New  York  . 
Philadelphia 
San  Francisco 
St.  Louis 


RECEIPTS. 

$32,461,135 
77,530,496 

77.5S4.354 
22,290,595 

46,828,343 

,398,642,961 

109,281,569 

43.954,936 

57,309,348 


DISBURSEMENTS. 

$32.599,336 
81,617,038 
76,321,587 
21,516,670 
47,921,294 
1,441,310,453 
115,982,748 
39,807,728 
58,081,172 


The  following  table  shows  the  comparative  growth  of 
the  staff  and  expense  of  the  sub-treasuries  from  1849  to 
1889  ■}  — 


1849. 

1889. 

OFFICERS 

AND 

SALARIES. 

EMPLOYEES. 

SALARIES. 

CLERKS. 

Baltimore 

'4 

$2I,600 

Boston   .     .     . 

Chicago 

Cincinnati 

$3,400 

23 
18 
12 

36,9IO 
25,900 
16,560 

New  Orleans  . 
New  York  .     . 
Philadelphia  . 
San  Francisco 

2 

6 

1,400 
9,IOO 
1,400 

12 

IOO 
24 
15 

l8,090 

177,490 

34,920 

27,120 

St.  Louis    .     . 
Charleston 

2 

3400 
3.400 

12 

17,860 

Totals      .... 

16 

$21,900 

23O 

$376,450 

1  The  column  "  employees,"  in  18S9,  includes  all  persons  who  have  employ- 
ment at  the  sub-treasuries,  —  officers,  clerks,  janitors,  messengers,  etc. ;  the 
corresponding  column  for  1S49  includes,  as  it  reads,  only  officers  and  clerks. 
The  complete  list  of  employees  for  that  year  was  not  conveniently  accessible. 


84  THE   INDEPENDENT   TREASURY. 

A  law  of  March  2,  1853,  fixed  the  compensation  of  the 
officers  of  appointed  depositories  at  one-half  of  one  per 
cent,  on  the  first  $100,000  received;  one  fourth  of  one  per 
cent,  on  the  second  equal  amount;  and  one  eighth  of  one 
per  cent,  on  all  sums  over  $200,000.  The  depositary  paid 
his  own  rent  out  of  the  sum  thus  received.  These  provis- 
ions were  not,  however,  to  apply  to  offices  in  which  the 
maximum  compensation  allowed  by  law  was  already  re- 
ceived. Nor  could  any  officer  receive  a  commission  that 
would  make  his  total  income  greater  than  such  maximum; 
and  the  whole  amount  received  by  any  one  depositary 
could  not  exceed  $1,500. 

The  exigencies  of  the  Civil  War  rendered  an  enlarge- 
ment of  the  number  of  depositories  necessary  until  the 
national  banks  were  established  inconsiderable  numbers. 
Depositories  have  existed  at  one  time  or  another  in  the 
following  places,  in  addition  to  the  sub-treasuries  men- 
tioned in  the  table  above:  Buffalo,  N.Y.,  Charlotte, 
N.  C. ;  Dahlonega,  Ga.  ;  Denver,  Col. ;  Dubuque,  la.  ;  Jef- 
fersonville,  Ind.  ;  Little  Rock,  Ark.  ;  Louisville,  Ky. ; 
Mobile,  Ala. ;  Nashville,  Tenn. ;  Norfolk,  Va.  ;  Pittsburg, 
Pa. ;  Richmond,  Va.  ;  Santa  Fe,  N.  M.  ;  Tallahassee,  Fla. ; 
and  Wilmington,  Del.  Some  of  these  were  made  assay 
offices  by  the  coinage  law  of  1873,  and  others  were 
dropped  entirely. 

The  assistant  treasurer  and  all  officers  authorized  by 
law  to  act  as  such  are  required  to  give  bonds  for  the 
faithful  discharge  of  their  duties,  the  amount  to  be  fixed 
by  the  Secretary  of  the  Treasury,  and  the  sureties  to  be 
approved  by  the  Solicitor  of  the  Treasury.1 

Not  only  has  the  amount  of  work  of  the  kind  originally 

1  U.  S.  Revised  Statutes,  §  3600. 


ITS  ORGANIZATION  AND    WORK.  85 

performed  by  the  Sub-Treasury  largely  increased,  but  the 
nature  of  the  work  itself  has  greatly  changed.  As  origi- 
nally conceived, the  Sub-Treasury  was,  in  its  organization, 
so  simple  that  its  accounts  might  possibly  have  been  kept 
in  the  simple  manner  ascribed  to  Gouge's  "  ingenious 
cord-wainer."  x  Its  duties  were  simply  the  receipt  and 
payment  of  public  money,  in  coin  and  treasury  notes. 
The  change  is  due,  in  general,  to  the  growth  of  the  scope 
of  government  financial  operations,  and  specifically  to 
those  connected  with,  and  consequent  on,  the  Civil  War; 
and  also  to  the  monetary  policy  that  the  country  has  pur- 
sued since. 

The  work  of  the  sub-treasuries  consists,  in  general, 
in  receiving  and  paying  all  public  money,  receiving 
deposits  of  disbursing  officers,  and  in  issuing  and  re- 
deeming, under  proper  regulations,  all  money  of  the 
United  States.  Besides  the  nine  assistant  treasurers, 
the  superintendents  of  the  mints  at  Carson  City  and  Boise 
City  are  required  by  law  to  perform  the  duties  of  assist- 
ant treasurers.  In  addition  to  the  sub-treasuries  and 
one  or  two  designated  depositories,  the  national  banks 
also  are  keepers  of  the  public  money.  By  the  act  estab- 
lishing them  provision  was  made  for  depositing  the 
receipts  from  internal  revenue  in  these  banks,  and  they 
have  been  used  by  the  government  for  that  purpose  ever 
since.  An  effort  was  made  in  1868  to  rescind  the  pro- 
vision of  the  law  making  them  public  depositories.  On 
Jan.  28  of  that  year  a  bill 2  passed  the  House  of  Repre- 
sentatives prohibiting  the  depositing  of  public  money  in 
banks  in  any  cities  or  places  in  which  there  was  a  treas- 
urer or  an  assistant  treasurer,  and  prohibiting  collectors 

1  See  above,  p.  28. 

2  H.  R  bill  450.     See  House  Journal,  40th  Cong.,  25th  sess.,  p.  265. 


86  THE  INDEPENDENT  TREASURY. 

and  disbursers  of  public  money  from  depositing  public 
money  in  banks,  if  they  were  within  fifty  miles  of  a 
sub-treasury.  The  bill  failed,  however,  to  become  a 
law. 

The  banks  were  to  be  allowed  to  hold  public  money 
on  providing  security  by  the  deposit  of  United  States 
bonds,  or  otherwise,  under  regulations  prescribed  by  the 
Secretary  of  the  Treasury.  The  custom  for  a  long  time 
was  to  allow  the  banks  to  hold  public  money  up  to  ninety 
per  cent,  of  the  par  value  of  the  bonds  deposited  as  secu- 
rity. But  after  the  bonds  rose  so  as  to  command  high 
premiums,  it  became  unprofitable  for  the  banks  to  deposit 
them  in  advance  as  security  for  the  public  money,  because 
the  money  reached  them  only  as  it  was  collected  in  taxes, 
and  this  was  often  too  slow  a  process  to  be  to  their  ad- 
vantage. Moreover,  the  practice,  in  the  earlier  years  of 
the  system,  was  for  the  Treasurer  to  draw  against  his 
bank  balances  whenever  funds  were  needed.  "  In  conse- 
quence the  balances  were  not  uniform,  but  fluctuated  from 
sixty  per  cent,  to  par  of  the  face  value  of  the  security. 
About  October,  1886,  the  practice  became  quite  general 
to  allow  a  fixed  balance  equal  to  ninety  per  cent,  of  the 
face  value  of  the  United  States  four  per  cent,  bonds,  and 
a  somewhat  smaller  amount  on  four  and  one-half  and 
three  per  cent,  bonds.  This  rule  was  changed  in  May, 
1887,  and  a  balance  equal  to  par  allowed  on  four  per 
cents.  Later,  in  October,  in  view  of  the  stringency  of 
the  money  market  and  the  amount  of  surplus  in  the 
Treasury,  and  as  an  inducement  to  banks  to  become 
depositories,  the  rule  was  again  changed,  and  a  balance 
was  allowed  equal  to  one  hundred  and  ten  per  cent,  of 
the  face  value  of  four  per  cent,  bonds,  and  par  of  the  four 
and   one-half   per    cents,    whenever   a  sufficient    margin 


ITS  ORGANIZATION  AND    WORK.  8/ 

remained  to  cover  the  largest  deposit  likely  to  be  received 
in  any  one  day."  1 

Secretary  Fairchild  also  increased  the  number  of  de- 
pository banks  at  this  time,  and  raised  the  limit  of  the 
amount  of  money  that  could  be  held  by  any  one  bank 
from  one-half  to  one  million  dollars. - 

When  Secretary  Windom  received  the  Treasury  port- 
folio he  changed  the  policy  of  his  predecessor  as  to  the 
extent  of  the  use  of  the  national  banks  as  depositories, 
and  the  amount  of  money  held  by  them  has  been  steadily 
reduced  under  the  present  administration. 

Under  the  law,  all  collectors  and  receivers  of  public 
money,  in  places  where  there  is  a  sub-treasury  or  a 
depository,  are  required  to  deposit  their  receipts  in  the 
sub-treasury  or  depository  at  least  once  a  week,  and 
may  be  ordered  to  do  so  oftener  by  the  Secretary  of  the 
Treasury.  Marshals  and  district  attorneys  may  pay  their 
receipts  into  any  legal  depository.  Failure  to  comply 
with  the  provisions  of  the  law  as  to  making  deposits 
renders  the  offender  indictable  for  embezzlement. 

Disbursing  officers  are  required  to  deposit  their  money 
in  the  same  way  as  are  collectors,  and  to  draw  on  the 
deposits  only  as  it  is  necessary  for  the  payment  of  lawful 
debts. 

Every  depositary  is  required  to  keep  the  accounts  of 
any  money  belonging  to  the  Post-Office  Department  sepa- 
rate from  his  accounts  of  other  public  money  received  by 
him. 

The  New  York  sub-treasury  may  be  taken  as  a  model 
of  all,  and  an  account  of  its  organization  and  work  will 
give  an  insight  into  the  system. 

1  Exec.  Doc.  No.  243,  50th  Cong.,  1st  sess.  (Secy.  Fairchild  in  a  letter 
to  the  House  of  Representatives.) 

-  See  Commercial  and  Financial  Chronicle,  Oct.  15,  1887. 


88  THE  INDEPENDENT  TREASURY. 

The  sources  of  its  receipt  of  money  are  new  currency 
from  Washington,  deposits  for  transfer  by  the  Treasury 
Department  to  other  points,  customs,  transfers  of  public 
money  from  depository  banks,  sales  of  gold  by  the  Assay 
Off  je,  internal  revenue,  patent  fees,  the  annual  tax  on 
national  banks,  from  postmasters  for  the  account  of  the 
Post-Office  Department,  deposits  for  the  shipment  of 
silver  coin,  and  deposits  by  individuals,  banks,  and  firms, 
for  redemption  and  exchange.  This  last  may  be  muti- 
lated or  worn  money,  or  it  may  be  money  of  one  kind,  in 
good  condition,  deposited  in  exchange  for  another  kind, 
as  greenbacks  for  gold,  or  vice  versa.  The  Sub-Treasury 
is  a  money-receiving,  money-paying,  and  money-exchan- 
ging establishment. 

The  sub-treasury  at  New  York  is  divided  into  depart- 
ments as  follows:  The  receiving  and  the  paying  depart- 
ments, the  minor-coins  department,  the  bonds  department, 
and  the  checks  department.  As  a  matter  of  fact,  the 
classification  is  in  practice  carried  farther,  so  that  there 
may  be  distinguished  the  general  receiving,  and  the  gold- 
receiving,  departments ;  the  general  paying,  and  the  coin- 
paying,  departments ;  the  coupon  division,  the  registered 
interest  division,  the  accounting  and  auditing  division, 
and  the  book-keeper's  division. 

The  general  receiving  department  is  that  into  which 
all  money  other  than  gold  is  paid.  All  notes  paid  in  are 
counted  and  sorted  here,  and  counterfeits  detected  and 
thrown  out.  National  bank-notes  as  well  as  government 
notes  are  received,  for  the  government  accepts  them  now 
in  payment  of  all  dues  except  customs. 

The  "checks  division"  has  charge  of  the  receipt,  pay- 
ment, and  issue  of  all  checks.  It  is  really  a  part  of  both 
the  receiving  and  the  paying  departments. 


ITS  ORGANIZATION  AND    WORK.  89 

The  number  of  checks  handled  is  very  large.  Prob- 
ably at  least  two-thirds  of  the  whole  number  of  pensions 
are  paid  in  checks  on  New  York,  making  a  million  and  a 
half,  or  more,  checks  annually  from  this  source  alone. 
Besides  these,  the  New  York  sub-treasury  pays  checks 
of  several  hundred  disbursing  officers,  paymasters,  quar- 
termasters, and  others,  who  use  in  all  nearly  half  a  mil- 
lion checks  a  year. 

In  the  coins  division  a  sub-division  of  labor  is  necessary 
on  account  of  the  great  number  of  coins  that  are  received 
of  different  denominations.  Hence  in  the  minor-coins 
division  there  are  clerks  whose  whole  time  is  taken  up 
in  receiving,  counting,  and  sorting  coins  of  only  one  or 
two  different  denominations,  as  one-cent  and  five-cent 
pieces. 

The  coupon  and  the  registered  interest  divisions  are, 
of  course,  really  divisions  of  the  bonds  department,  and 
their  business  is  confined  to  dealing  with  the  public 
debt. 

The  accounting  department  is  the  one  in  which  all 
checks  are  finally  gathered,  classified,  entered,  and  veri- 
fied; and  all  accounts  of  disbursing  officers  are  rendered 
monthly.  It  may  be  noticed  in  this  connection  that  the 
accounts  of  the  general  Treasury  are  kept  separate  from 
those  of  disbursing  officers.  In  the  work  of  this  depart- 
ment we  find  an  explanation  of  a  fact  which  we  will  have 
occasion  to  notice  later,  that  sometimes  the  reported 
receipts  and  disbursements  of  the  Sub-Treasury  do  not 
correspond  with  the  amounts  of  money  actually  received 
or  disbursed.  For  there  are  many  transfer  transactions 
which  appear  only  on  the  books.1  For  example,  the 
Treasurer  transfers  from  the  cash  in  the   office,  held  on 

1  For  the  form  of  a  correct  currency  statement,  see  Appendix,  p.  iii. 


90  THE  INDEPENDENT  TREASURY. 

account  of  the  general  Treasury,  a  million  dollars,  to  be 
placed  to  the  credit  of  a  pension  agent,  against  which  the 
latter  issues  checks.  On  the  books  that  is  treated  as  a 
payment  from  the  general  Treasury  and  a  receipt  by  the 
pension  agent's  account,  although  no  money  is  actually 
paid  out  until  the  pension  agent's  little  checks  begin  to 
come  in. 

The  names  of  the  other  departments  carry  with  them  a 
sufficient  explanation  of  the  work  done  in  them.  A  brief 
account  of  the  mode  and  conditions  of  the  issue  and 
redemption 1  of  currency  by  the  Sub-Treasury  will  be 
interesting. 

All  United  States  notes,  and  all  national  bank  notes, 
that  are  unfit  for  redemption,  are  replaced  with  new  notes 
at  the  Treasury,  or  at  a  sub-treasury,  free  of  charge ; 
and  United  States  notes  are  redeemed  in  gold,  in  sums 
not  less  than  fifty  dollars,  at  the  sub-treasuries  in  New 
York  and  San  Francisco;  gold  certificates  are  issued  for 
not  less  than  twenty  dollars  on  deposit  of  gold  coin  at 
a  sub-treasury;  silver  certificates  are  issued  for  silver 
deposits,  or  for  other,  worn-out,  certificates ;  and  treasury 
notes  of  the  law  of  1890  are  exchanged  for  silver  bullion. 

Silver  dollars  are  exchanged  at  the  Treasury  or  a  sub- 
treasury  for  silver  certificates  or  silver  bullion  notes; 
and  fractional  silver  is  issued  in  any  amount  desired  in 
exchange  for  government  or  bank  notes.  On  the  other 
hand,  fractional  silver  coin  and  minor  coin  may  be  de- 
posited in  sums  of  twenty  dollars,  or  multiples  of  twenty, 
and  "lawful  money"  received  in  exchange.  Standard 
silver  dollars  are  exchangeable  for  silver  certificates 
only. 

1  For  a  full  account  of  the  rules  at  present  governing  the  issue  and  redemp- 
tion of  currency,  see  Appendix,  p.  vii. 


ITS  ORGANIZATION  AND    WORK.  9 1 

Under  the  head  of  issue  and  redemption  of  currency 
is  included  the  transfer  of  money  from  one  part  of  the 
country  to  another.  The  transfer  here  spoken  of  must  be 
distinguished  from  the  transfer  of  the  government's  own 
money.  This  transfer  relates  to  the  money  of  individuals 
or  of  banks  deposited  at  some  sub-treasury.  Formerly 
the  banks  themselves  paid  the  full  expense  of  shipping 
money  to  the  interior  to  meet  the  demand  for  ''moving 
the  crops."  But  after  the  Bland  silver  law  went  into 
effect  it  was  soon  found  that  the  silver  dollars  were 
accumulating  in  the  Treasury,  instead  of  passing  perma- 
nently into  circulation.  To  overcome  this  difficulty  the 
Secretary  of  the  Treasury  took  advantage  of  the  usual  fall 
movement  of  the  currency  to  send  silver  to  the  interior, 
and  at  the  same  time  to  increase  the  Treasury  reserve  of 
gold.  In  September,  1880,  he  issued  a  circular  author- 
izing the  delivery  of  silver  certificates  at  sub-treasuries 
in  the  interior,  in  exchange  for  gold  deposited  at  the 
sub-treasury  in  New  York,  and  the  government  paid  the 
express  charges.  The  order  was  rescinded  in  January, 
1885,  and  the  present  system  adopted  instead. 

In  the  crisis  of  1890  a  farther  step  was  taken.  To 
relieve  the  money  market  at  that  time  the  Secretary  of 
the  Treasury  authorized  the  assistant  treasurer  at  San 
Francisco  to  receive  deposits  of  funds  from  bankers  who 
desired  to  transfer  them  by  telegraph  to  the  assistant 
treasurer  at  New  York.  The  purpose  was  to  enable  those 
having  money  in  San  Francisco,  which  was  not  needed 
there,  to  transfer  it  for  immediate  use  in  New  York.  The 
same  privilege  was  promised  to  other  places  at  which 
there  were  sub-treasuries,  if  it  proved  of  any  service  in 
affording  relief.  The  order  was  soon  complained  of, 
however,  by  the  San  Francisco   bankers,  on  the  ground 


92  THE  INDEPENDENT  TREASURY. 

that  it  diminished  their  available  reserve.  The  amount 
of  transfers  under  the  circular  was  over  three  million 
dollars.  The  rules  at  present  governing  the  transfer  of 
money  for  banks  are  given  in  full  in  the  appendix. 

There  are  many  interesting  points  of  detail  that  are 
worth  noticing.  The  visitor  to  the  Treasury,  or  to  a 
sub-treasury,  is  always  interested  in  seeing  the  provis- 
ions for  the  safe  keeping  of  the  money  on  hand.  It  is 
kept  in  vaults,  or  strong  rooms,  usually  in  the  basement 
of  the  building.  There  are  five  of  these  vaults  in  the 
New  York  sub-treasury.  Four  of  them  are  bright  apart- 
ments, well  lighted  by  electricity,  on  the  main  floor 
of  the  building,  one  on  each  side,  and  one  under  each  of 
the  Pine  Street  side  corners  of  the  rotunda  floor.  These 
"vaults"  are  simply  large  safes,  or  strong  rooms,  full  of 
steel  drawers,  and  fitted  with  steel  walls,  ceilings,  floors, 
and  doors.  The  fifth  strong  room  may  be  accurately 
termed  a  vault;  it  is  the  largest  of  the  five  and  is  situated 
in  the  basement.  "Just  where  all  this  money  is  stored, 
on  the  site  of  the  Sub-Treasury,  once  stood  old  Federal 
Hall,  where  the  first  Congress  of  the  United  States  met 
when  the  future  of  this  country  was  in  the  balance;  and 
in  front  of  the  Sub-Treasury  building  was  George 
Washington  inaugurated  as  first  President  of  the  United 
States."1 

Fitted  into  the  walls  of  the  vaults  in  which  silver  is 
kept  are  iron  boxes,  or  closets,  of  uniform  size,  each 
large  enough  to  hold  one  hundred  bags  of  silver  contain- 
ing five  thousand  dollars  apiece.  As  much  as  forty  or 
fifty  million  dollars  of  silver  is  sometimes  collected  in  a 
single  vault. 

The  notes  are  stored  in  packages,  each  denomination 

l  New  York  Times,  Nov.  9,  1S90. 


ITS  ORGANIZATION  AND    WORK.  93 

by  itself,  and  one  thousand  notes  to  a  package.  This 
arrangement  is  convenient  both  for  storing  and  for 
counting. 

There  is  a  large  portion  of  the  money  in  the  sub- 
treasury  that  is  constantly  on  deposit;  that  is,  is  seldom 
paid  out.  This  is  true  of  the  larger  part  of  the  silver, 
which  is  represented  in  circulation  by  certificates.  This 
money  is  kept  in  vaults  sealed  with  the  seals  of  the 
assistant  treasurer  and  of  some  representative  of  the 
Treasurer  of  the  United  States.  When  it  becomes  neces- 
sary to  open  one  of  these  vaults,  the  seals  must  be  broken 
and  the  vault  unlocked  in  the  presence  of  both  parties 
interested,  or  in  that  of  their  duly  appointed  represent- 
atives. 

The  ordinary  vaults,  those  which  are  in  use  every  day, 
are  in  the  charge  of  a  vault-keeper,  cannot  be  entered 
except  in  his  presence,  and  even  then  only  during  busi- 
ness hours,  because  most  of  the  vaults  are  fitted  with 
time  locks. 

The  accounts  of  the  sub-treasury  are,  of  course,  bal- 
anced every  day,  and  a  statement  of  the  day's  business 
is  forwarded  to  Washington. 

Not  the  least  interesting  work  performed  at  the  sub- 
treasury  is,  to  the  casual  visitor,  the  details  of  the 
redemption  of  currency.  Mutilated  currency  usually 
reaches  the  sub-treasury  in  the  form  of  deposits,  or  is 
sent  in  for  redemption  by  the  banks,  while  very  often 
men  come  alone  and  make  inquiry  about  doubtful  bills. 
The  deposits  contain  new  as  well  as  old  notes,  and  some- 
times counterfeits.  The  clerks  assort  the  bills  as  they 
are  counted,  putting  together  those  that  are  still  fit  for  cir- 
culation. The  larger  part  of  the  mutilated  money  con- 
sists of  bills  of  small  denomination,  ones,  twos,  and  fives 


94  THE  INDEPENDENT  TREASURY. 

forming  the  heaviest  contribution.  The  good  bills  are 
sent  over  to  the  paying  department  for  disbursement, 
while  the  mutilated  ones  are  tied  up  in  packages  of  one 
hundred  bills  each,  and  are  cancelled  by  having  a  hole 
of  about  the  same  diameter  as  that  of  a  lead  pencil 
punched  through  them.  The  punched  bills  are  then  sent 
on  to  Washington,  where  they  are  counted;  they  are  then 
split  in  halves  lengthwise,  and  are  recounted  twice.  If 
the  count  is  found  to  be  correct,  the  cancelled  bills  are 
then  ground  into  pulp  and  so  destroyed. 

The  clerks  in  the  receiving  department,  besides  culling 
out  the  mutilated  bills  that  come  into  the  Treasury,  are 
on  the  constant  lookout  for  counterfeits.  So  quick  are 
they  in  detecting  spurious  paper,  that,  although  they  may 
be  counting  bills  at  the  rate  of  one  hundred  a  minute,  the 
momentary  glance  at  a  bill  as  it  passes  under  their  eyes 
is  sufficient  to  let  them  know  whether  it  is  good  or  bad. 
On  an  average  between  two  hundred  and  three  hundred 
counterfeit  bills  a  month  are  brought  into  the  sub-treasury. 
When  a  counterfeit  is  found  it  is  stamped  with  a  steel 
die  that  cuts  the  word  "  counterfeit  "  in  large  letters  out 
of  the  bill.  Counterfeits  are  not,  however,  confined  to 
notes.  There  are  counterfeit  coins  also.  Filled  coins 
are  the  most  dangerous  of  this  class,  especially  filled 
gold  coins,  as  they  are  the  most  profitable.  The  coin, 
in  this  case,  has  been  cut  open  and  a  portion  of  the 
gold  taken  out:  it  is  then  filled  in  with  some  base  metal 
which  gives  it  approximately  correct  weight.  These 
coins  circulate  with  the  public,  but  the  sub-treasury 
clerks  promptly  detect  them  and  throw  them  out. 

The  precautions  taken  for  preventing  robbery  are,  of 
course,  great.  The  contrast  between  the  defences  of  the 
New  York  sub-treasury  and  those  which  Gouge  so  graph- 


ITS  ORGANIZATION  AND    WORK.  9$ 

ically  described  in  1857  *  is,  in  its  degree  and  kind,  of 
the  same  general  character  as  that  between  the  state  of 
the  progress  of  the  country  then  and  now.  Iron  shutters, 
steel-barred  doors,  and  a  dozen  or  more  armed  watchmen 
and  detectives,  furnish  security  to  a  mass  of  treasure 
greater  probably  than  the  founders  of  the  Independent 
Treasury  ever  dreamed  would  be  in  its  possession. 
1  See  p.  55. 


96  THE  INDEPENDENT  TREASURY. 


CHAPTER    V. 

THE    INDEPENDENT    TREASURY    AND   THE 
MANAGEMENT    OF    LOANS. 

WRITING  in  1853,  Mr.  Andrew  D.  Young  speaks  of 
the  Sub-Treasury  as  existing  with  the  silent  "  ac- 
quiescence of  the  popular  will,  if  not  the  positive  approval 
of  the  public  judgment."  1 

It  is  inevitable  that  an  institution  established  under 
the  auspices  which  witnessed  the  adoption  of  the  Inde- 
pendent Treasury  should  receive  hostile  criticism  from 
many  quarters.  Besides  the  many  attacks  made  on  polit- 
ical grounds,  in  the  turbulent  party  warfare  which  raged 
in  bitter  violence  through  the  years  immediately  preced- 
ing its  final  establishment,  it  has  from  time  to  time  ever 
since  been  a  mark  for  the  shafts  of  many  foes,  who,  from 
motives  interested  or  disinterested,  have  branded  it  as 
an  institution  so  baneful  in  its  influence  on  the  business 
interests  of  the  country  that  it  ought  to  be  abolished. 
Opinions  of  this  nature  cannot  now  be  suspected  of  being 
based  on  mere  political  partisanship.  Indeed,  so  far  as 
the  question  of  the  advantages  of  the  system  can  now  be 
called  a  matter  of  party  politics  at  all,  it  is  one  on  which 
the  two  great  parties  seem  largely  to  have  changed  posi- 
tions. The  Sub-Treasury  is,  in  its  origin,  a  Democratic 
institution.  But  to-day  we  find  its  benefits  questioned 
more  by  Democratic  politicians  and  statesmen  than  by 
'  See  p.  58. 


THE  MANAGEMENT  OF  LOANS.  97 

those  of  Republican  affiliations.  In  fact,  some  of  the 
latter  seem  to  regard  the  Sub-Treasury  as  almost  the  only 
fruit  of  Democratic  power  and  legislation  for  which  that 
party  can  be  commended.  But  others  besides  party  ad- 
herents have  attacked  the  Sub-Treasury,  and  on  grounds 
altogther  disinterested;  on  reasonable,  scientific  grounds 
that  command  attention  and  compel  the  admission  that 
the  question  of  its  benefits  is  fairly  open,  and  is  to  be 
settled  only  by  an  examination  of  its  influence  on  the 
business  of  the  country  to-day,  and  under  conditions  very 
different  from  those  which  prevailed  at  the  time  of  its 
establishment.  Adverse  judgments  have  been  pronounced 
on  the  system  almost  every  year  since  its  adoption.  One 
has  already  been  quoted,  that  of  the  Bankers1  Magazine. 
It  is  to  be  noticed,  however,  that  the  position  of  that 
magazine  is  different  to-day.  In  the  issues  of  October 
and  November,  1890,  it  mentioned  the  matter,  saying 
editorially  in  the  former:  "The  remedy,  proposed  a 
thousand  times  [for  relieving  stringencies  in  the  money 
market]  is  the  abolition  of  the  Sub-Treasury  Depart- 
ment, and  the  putting  of  the  government  deposits  in 
the  banks.  This,  however,  we  believe  would  be  no  help 
at  all,  for  the  banks,  doubtless,  would  lend  these  de- 
posits just  as  they  do  others,  and,  therefore,  there  would 
be  nothing  left,  especially  for  times  of  stringency.  .  .  . 
This  remedy,  therefore,  has  no  merit  whatever.  What  is 
needed  is  a  reserve  somewhere,  and  for  aught  we  see,  the 
government  might  just  as  well  keep  it  as  the  banks.''  In 
1856  Dr.  Calvin  Colton  wrote:1  '"This  government  in- 
stitution, therefore,  thus  becomes  an  interfering  power 
with  the  banking  operations  of  the  country  to  disturb  and 
embarrass   them.   ...    In  this  way  all    the    contingent 

1  "  Public  Economv  for  the  I'nited  States  "  A.  S.  Barnes,  1S53. 


98  THE   INDEPENDENT   TREASURY. 

wealth  of  which  the  people  of  the  United  States  may  at 
any  time  be  deprived,  by  the  operation  of  the  Sub-Treas- 
ury, in  subverting  the  banking  system  of  the  country, 
reducing  the  circulating  medium  when  it  is  most  wanted, 
embarrassing  trade,  and  circumventing  commerce,  is  a 
tax." 

In  1867,  Mr.  J.  S.  Gibbons,  in  his  "Public  Debt  of  the 
United  States,"  1  condemns  the  system  in  terms  of  still 
greater  severity.  "The  Independent  Treasury,"  he  says, 
"aggravates  every  disadvantage  of  the  public  debt,  in- 
creases the  expenses,  gives  no  special  security  to  the 
custody  of  the  funds,  is  a  vast  lever  of  political  corrup- 
tion, a  perpetual  threat  over  the  markets,  and  a  violation 
of  the  first  principles  of  economy."  He  further  declares 
the  system  to  be  a  return  to  the  primitive  "  strong-box  " 
method  of  more  unsafe  times,  and  asserts  that  it  has 
influence  in  increasing  the  burden  of  taxation. 

The  author  of  "  Money,  Trade,  and  Banking  "  2  declares 
the  Sub-Treasury  to  be  "  the  one  obstacle  that  stands  in 
the  way  of  a  prompt  withdrawal  of  all  forms  of  govern- 
ment demand  notes."  He  further  pronounces  it  a  great 
curse,  as  giving  to  the  Secretary  of  the  Treasury  powers 
that  no  man  should  have,  making  him  lock  up  money 
from  circulation,  an  action  which  is  illegal  for  the  banks; 
and  as  alternately  inflating  and  contracting  the  currency, 
and  thus  keeping  the  people  in  suspense;  and,  finally, 
he  declares  that  "  the  vicious  Sub-Treasury  system  and 
the  government  legal  tender  note  system  supplement  and 
support  each  other  to  the  good  of  none  and  the  injury  of 
all."  Prof.  J.  Laurence  Laughlin,  of  Chicago  University, 
is  also  a  critic  of  the  institution.      In  an  excellent  dis- 

1  Chas.  Scribner  and  Co..  1867,  p.  127. 

2  J.  H.  Walker:  see  page  84. 


THE  MANAGEMENT  OF  LOANS.  99 

cussion  of  the  subject  in  the  North  American  Review  for 
December,  1883,  he  asserts  that  "the  chief  objection  to 
the  Independent  Treasury  system  of  to-day  is  that  it  has 
been  outgrown  by  the  country;  that  it  is  economically 
wasteful  in  proportion  to  the  magnitude  of  its  dealings; 
and  that,  by  its  effect  on  the  reserves  of  the  banks,  it  is 
becoming  dangerous  to  the  banking  and  business  public." 
Still  another  quarter  from  which  hostile  shafts  of  criticism 
have  been  hurled  at  the  Sub-Treasury  is  that  of  the  United 
States  Treasury  itself.  It  has  been  wounded  in  the  house 
of  its  friends,  and  declared  a  nuisance  by  the  representa- 
tives of  the  party  that  gave  it  birth!  As  already  noted, 
under  the  administration  of  President  Cleveland  the 
Treasury  officials  regarded  its  influence  as  evil.  "The 
causes  which  led  to  the  adoption  of  the  Sub-Treasury 
system  no  longer  exist.  ...  In  1846,  when  the  present 
system  was  adopted,  there  was  a  general  feeling  that  the 
government  deposits  were  insecure,  and  that  the  character 
of  the  State  banks  was  such  that  they  could  not  be  prop- 
erly selected  to  act  as  fiscal  agents  of  the  United  States."  x 
Secretary  Windom,  on  taking  the  Treasury  portfolio, 
thought  it  incumbent  on  him  to  vindicate  the  institution 
which  his  party  forefathers  had  opposed,  by  reversing  the 
policy  of  his  immediate  predecessor  as  to  government 
deposits  in  the  national  banks. 

Other  opponents  could  be  mentioned,  for  there  arc 
many;  but  these  are  sufficient  to  arrest  attention  and 
command  an  examination  of  the  subject  with  a  view  to 
determining  whether  their  position  is  well  taken. 

The  ground  of  attack  has,  however,  changed.  In  the 
early  days  of  the  Independent  Treasury,  one  strong  reason 
assigned  for  denouncing  it  was  the  very  purpose  of  its 

l  Doc.  1834  of  Sen.  Com.  Repts.  (on  H.  K.  Bill  902),  49th  Cong.,  2d  session. 


100  THE  INDEPENDENT  TREASURY. 

establishment;  namely,  that  it  separated  the  government 
entirely  from  private  business.  The  basis  of  attack  on 
the  institution  now  is  that  it  is  government  interference 
with  the  business  of  the  country.  If  this  change  of  base 
on  the  part  of  the  critics  be  justifiable,  it  must  be  due  to 
a  change  in  the  functions  of  the  Sub-Treasury.  The 
changes  which  have  taken  place  in  the  character  of  the 
institution  have  been  noticed  in  the  preceding  chapter. 
Whether  it  is  capable  of  doing  well  the  work  that  now 
falls  to  it,  and  in  what  way  it  influences  the  business 
community,  must  now  be  our  inquiry. 

Government  financial  machinery  should  be  capable  of 
*  adaptation  to  the  various  sets  of  circumstances  which  a 
government  is  at  different  times  called  on  to  pass  through. 
It  should  be  such  as  will  work  with  reasonable  smooth- 
ness, and  without  injurious  influence,  both  in  war  and 
in  peace,  in  times  of  financial  distress  and  in  the  periods 
of  ordinary  business  activity.  Our  examination,  there- 
fore, naturally  falls  into  three  parts:  the  operation  of  the 
Independent  Treasury  during  war,  with  the  possibly  con- 
comitant regime  of  paper  money;  the  influence  of  its  action 
on  the  business  of  the  country  in  ordinary  times,  and  its 
workings  in  the  stormy  periods  of  financial  life  known  as 
crises  and  panics.  Fortunately,  from  the  scientific  point 
of  view,  the  system  has  been  in  operation  in  each  of  these 
different  sets  of  circumstances.  The  experience  of  the 
Civil  War  furnishes  sufficient  data  for  determining  its 
usefulness  as  a  fiscal  engine  at  such  times;  the  succeed- 
ing years  will  afford  opportunity  for  testing  the  efficiency 
of  the  system  in  great  transactions  of  refunding  the 
public  debt  and  resumption  of  specie  payments;  and  its 
working  in  the  last  few  years  must  be  the  basis  of  our 
judgment  of  its  value  in  ordinary  times  and  in  crises. 


THE  MANAGEMENT  OF  LOANS.  101 

The  Mexican  war  and  the  Civil  War  have  both  occurred 
since  the  Independent  Treasury  became  the  established 
medium  for  the  collection  and  disbursement  of  the  rev- 
enue. But  the  two  wars  were  so  different  in  the  magni- 
tude of  their  operations,  and,  consequently,  in  their 
demands  on  the  resources  of  the  country;  the  industrial 
condition  of  the  country  itself  was  so  different  in  the  two 
periods;  and  the  scale  of  fiscal  operations  of  the  govern- 
ment in  the  latter  case  was  so  much  greater  than  in  the 
former;  that  the  data  of  the  two  periods  would,  considered 
by  themselves,  teach  very  different  lessons.  Yet,  even  in 
the  former,  the  Independent  Treasury  was  found  to  cause 
difficulty  in  placing  loans.  The  first  time  that  such  a 
difficulty  was  experienced  was  in  1846.  In  October  of 
that  year  Secretary  Walker  advertised  for  the  exchange 
of  three  million  dollars  of  treasury  notes  at  par  for  specie. 
Very  few  responses  were  made,  however.  "The  magni- 
tude of  the  loan,  the  fluctuations  below  par  of  the  previous 
stocks  and  notes,  the  untried,  and,  to  many,  alarming  re- 
straining operation  of  the  Constitutional  Treasury,  the 
heavy  expenditure  of  the  war,  and  the  requirements  of  all 
payments  from  time  to  time  in  specie,  were  deemed  by 
many  as  insuperable  obstacles  to  the  negotiation  of  the 
whole  of  the  loan  at  or  above  par."  The  contractile  influ- 
ence of  the  Sub-Treasury  was  evident  even  at  that  early 
day,  and  this,  together  with  the  refusal  to  accept  any- 
thing but  specie,  interfered  with  the  placing  of  loans. 
Yet,  in  the  opinion  of  the  Secretary  of  the  Treasury,  the 
refusal  of  the  government  to  receive  or  pay  out  anything 
but  specie  in  its  transactions  enhanced  its  credit  and  so 
made  its  efforts  to  place  loans  more  successful  than  they 
would  otherwise  have  been.  This  opinion  was  doubtless 
to  some  extent  correct. 


102  THE   INDEPENDENT  TREASURY. 

It  is  the  Civil  War,  rather  than  the  Mexican,  that 
is  typical  of  what  the  scale  of  operations  of  any  future 
war  that  we  may  engage  in  will  probably  be,  and  its 
lessons  are,  therefore,  correspondingly  the  more  valuable. 
Our  main  attention  must  consequently  be  given  to  it. 

The  struggle  opened  with  the  country  in  a  good  indus- 
trial condition,  but  with  a  revenue  altogether  inadequate 
to  the  prosecution  of  a  great  war,  and  with  a  system  of 
taxation  which  could  not  easily  be  so  adjusted  as  to  pro- 
duce such  a  revenue.  The  government  was  thus  com- 
pelled to  rely  on  its  credit  for  immediate  resources,  and 
the  policy  of  carrying  on  the  war  largely  by  borrowing 
was  practically  adopted.  It  was  in  the  attempts  to  place 
the  large  loans  suddenly  made  necessary  by  the  tremendous 
increase  in  its  expenses  that  the  Treasury  Department 
first  found  the  means  at  its  disposal,  in  the  machinery 
of  the  Sub-Treasury,  inadequate  to  perform  the  services 
demanded  by  the  exigencies  of  the  new  situation. 

A  complete  separation  from  banks  made  it  necessary 
for  the  Treasury  to  be  its  own  broker.  It  had  to  sell  its 
own  bonds.  It  had  succeeded  in  doing  this  with  the 
loans  issued  during  the  war  with  Mexico,  and  on  several 
occasions  afterwards.  But  these  operations  were  trifles 
compared  with  the  gigantic  transactions  which  the  Treas- 
ury was  called  upon  to  undertake  when  confronted  with 
the  financial  problems  of  the  Civil  War.  The  amount 
borrowed  in  the  single  year  ending  December,  1861,  was 
over  three  hundred  millions  of  dollars,  while  the  loans 
contracted  during  the  whole  Mexican  war  summed  up  only 
forty-nine  millions  of  dollars.  It  was  not  easy  for  the 
Treasury  to  constitute  itself  a  broker's  office  on  so  large  a 
scale,  and  the  process  would  have  been  too  slow  to  meet 
the  needs  of  the  financial  situation. 


TEE   MANAGEMENT  OF  LOANS.  103 

Secretary  Chase  was  early  impressed  with  the  fact 
that  "the  safest,  surest,  and  most  beneficial  plan  would 
be  to  engage  the  banking  institutions  of  the  three  chief 
commercial  cities  of  the  seaboard  to  advance  the  amounts 
needed  for  disbursement.  "  x  Accordingly,  he  conferred 
with  their  representatives,  and,  on  their  agreeing  to 
advance  the  money  he  asked  for,  undertook  "to  issue 
three  years  7.30  bonds  or  treasury  notes,  bearing  even 
date  with  the  subscription,  and  of  equal  amount;  to 
cause  books  of  subscription  to  the  National  Loan  to 
be  immediately  opened ;  to  reimburse  the  advances  of 
the  banks,  as  far  as  practicable,  from  this  national 
subscription;  and  to  deliver  to  them  7.30  bonds,  or 
treasury  notes,  for  the  amount  not  thus  reimbursed." 
The  object  of  turning  to  the  banks  was  to  secure  the 
needed  money  speedily;  but  the  Secretary  wished  to 
give  the  public  an  equal  opportunity  with  the  banks 
to  subscribe  for  the  loan,  while  yet  avoiding  com- 
petition with  them  in  the  disposal  of  the  bonds.  The 
direct  popular  subscriptions  amounted  to  a  little  more 
than  half  the  $50,000,000  advanced  by  the  banks.  The 
second  loan  of  $50,000,000  seems  to  have  been  advanced 
wholly  by  the  banks;  and  "as  no  reasonable  prospect 
appeared  of  obtaining  terms  equally  advantageous  by 
advertisement,  .  .  .  the  Secretary  .  .  .  arranged  this 
third  loan  also  [of  Nov.  16,  1861]  with  the  associates,"  2 
that  is,  with  the  banks.  Secretary  Chase  did  attempt  to 
place  loans  directly,  that  is,  to  make  the  government  its 
own  agent;  and  at  the  same  time  he  tried  to  diffuse  the 
loans.  One  of  the  objects  which,  in  his  report  for  1863, 
he  tells  us  he  kept  steadily  in  view,  "in  the  creation  of 
debt  by  the  negotiation  of  loans  or  otherwise,"  was  "gen- 

1  Finance  Report,  1861,  p.  S.         '-  Ibid.,  p.  9. 


104  THE  INDEPENDENT  TREASURY. 

eral  distribution."  The  finance  report  for  1863  records 
a  certain  amount  of  success  in  the  attempt  to  place  some 
of  the  later  loans  by  popular  subscription.  "The  gen- 
eral distribution  of  the  debt  into  the  hands  of  the  greatest 
possible  number  of  holders,"  wrote  Secretary  Chase, 
".  .  .  has  been  accomplished  ...  by  arrangements  to 
popularize  the  loans  by  giving  to  the  people  everywhere 
opportunities  to  subscribe  for  bonds.  These  subscrip- 
tion arrangements  have  been  especially  useful  and  suc- 
cessful. They  have  been  adopted  as  yet  with  reference 
to  only  two  descriptions  of  bonds,  —  the  two  commonly 
known  as  seven-thirties  and  five-twenties.  .  .  .  The  plan 
of  distributing  the  seven-thirties  was  that  of  employing 
a  large  number  of  agents  in  many  places,  and  directing 
their  action  from  the  Department.  It  worked  well  for 
a  time,  but  was  soon  found  inadequate  to  the  financial 
necessities  of  the  government. "  Accordingly  this  plan 
had  to  be  abandoned,  and  the  work  intrusted  to  an 
agent;  that  is,  a  banker  or  broker  was  employed.  In 
June,  1864,  Secretary  Fessenden,  who  had  succeeded  Mr. 
Chase,  found  it  necessary  to  get  more  money;  accord- 
ingly, he  advertised  a  loan,  which  he  was  compelled 
to  withdraw  within  a  few  days,  as  the  public  would  not 
subscribe  on  the  terms  offered.  He  turned  to  the  banks, 
but  they  insisted  on  terms  to  which  he  would  not  agree, 
and  so  he  issued  greenbacks.  Thus  from  the  begin- 
ning of  the  war,  as  early  as  1861,  the  Secretary  had 
been  compelled  to  rely  on  the  banks  for  aid,  and  his 
report  for  1862  gives  full  acknowledgment  of  their 
assistance. 

The  final  break-down  of  the  government  independence 
of  the  banks  in  raising  loans  was  emphasized  by  the 
establishment  of  the  national  banks.      In  fact,  the  primary 


THE   MANAGEMENT  OF  LOANS.  105 

purpose  of  creating  the  national  banking  system  was  to 
make  a  market  for  government  bonds.  Secretary  Chase, 
"  in  his  report  for  1862,  said  that  among  the  advantages 
which  would  arise  from  the  establishment  of  a  national 
banking  system  would  be  the  fact  that  the  bonds  of  the 
government  would  be  required  for  banking  purposes;  a 
steady  market  would  be  established  and  their  negotiation 
greatly  facilitated;  a  uniformity  of  price  for  the  bonds 
would  be  maintained  at  a  rate  above  that  of  funds  of 
equal  credit,  but  not  available  as  security  for  circula- 
tion."1 

The  causes  which  made  it  necessary  for  the  government 
to  depend  on  the  banks  during  the  war  are  obvious 
enough.  In  the  first  place,  even  if  the  government  had 
established  a  net-work  of  agencies  over  the  country  for 
the  purpose  of  receiving  subscriptions  to  its  loans,  the 
plan  could  not  have  been  successful  in  meeting  its  finan- 
cial needs.  For  the  money  was  needed  immediately. 
The  loans  had  to  be  placed  quickly,  and  their  collection 
in  driblets,  so  to  speak,  even  if  possible  in  course  of  time, 
would  not  have  filled  the  coffers  of  the  Treasury  with 
sufficient  rapidity  for  its  needs.  The  vaults  of  the  banks 
were  the  only  place  where  large  amounts  of  money  could 
be  immediately  and  directly  obtained,  because  it  was  in 
them  only  that  sufficiently  large  amounts  were  already 
collected.  This  necessity  for  rapidity  in  getting  the 
money  would  of  itself  suffice  to  render  almost  useless,  at 
the  beginning  of  a  war,  a  system  of  agencies  for  popular 
subscription. 

Still  another  explanation  of  the  resort  of  the  govern- 
ment to  the  banks  for  loans  is  the  fact  that  the  arousing 
of  confidence  is  an  essential  element  in  the  floating  of  a 

1  Report  of  the  Comptroller  of  the  Currency,  1S79,  p.  113. 


106  THE  INDEPENDENT  TREASURY. 

loan,  and  for  the  government  to  have  established  confi- 
dence directly  in  the  minds  of  thousands  of  individuals 
subscribers  would  have  been,  under  the  existing  circum- 
stances, a  very  difficult  task.  But  when  the  banks  showed 
sufficient  trust  in  the  government  to  loan  it  their  funds, 
the  establishment  of  public  confidence  received  a  power- 
ful impulse.  For  the  banks  are  institutions  which  are 
supposed  to  know  the  trustworthiness  of  those  to  whom 
they  lend,  and  individual  capitalists  will  follow  where 
they  lead. 

The  lack  of  confidence  in  the  government  was  manifest 
on  several  occasions.  "The  prospect  of  negotiating  a 
loan  in  the  ordinary  way,"  the  Secretary  tells  us  in  1864, 
"  was  by  no  means  flattering,  as  the  notice  for  a  loan  of 
thirty-three  millions,  advertised  on  the  twenty-fifth  day 
of  June,  had  been  withdrawn  on  the  2d  of  July.  .  .  .  The 
Secretary  thought  it  advisable  to  borrow  .  .  .  fifty  millions 
of  dollars  of  the  banks."  1  The  negotiations  fell  through, 
however,  and  the  Secretary  again  advertised  for  a  loan, 
incurring  considerable  expense,  and  offering  "liberal 
inducements  to  stimulate  the  effort  of  corporations  and 
individuals  to  dispose  of  their  notes."  But  the  effort 
was  only  partly  successful. 

The  temporary  partial  success  in  1863  of  the  attempt 
to  place  loans  by  popular  subscription  may  perhaps  be 
ascribed  to  the  change  that  the  government  made  at  that 
time  in  its  financial  policy  for  the  management  of  the 
war.  The  inadequacy  of  the  loan  policy  was  seen  and 
steps  taken  to  increase  the  revenue  from  taxation.2 

1  Finance  Report.  1864,  p.  20. 

-  See  H.  C.  Adams's  "  Public  Debts,"  pp.  127-131.  A  table  is  given  there 
showing  the  course  of  the  government  credit  during  the  war ;  its  uniformly 
downward  course  was  temporarily  checked  towards  the  end  of  1863. 


THE  MANAGEMENT  OF  LOANS.  107 

The  government  may  be  dependent  on  banks  and 
bankers  for  the  success  of  its  financial  measures,  even 
although  it  does  not  employ  them  as  agents  to  sell  its 
bonds.  The  Secretary  of  the  Treasury  may  be  his  own 
broker,  may  be  administratively  independent  of  the  banks, 
and  yet  virtually  dependent  on  them.  For  he  may  be 
compelled  to  turn  to  them  as  the  only  available  purchasers 
of  bonds,  and  if  so,  he  must  adjust  the  terms  of  his 
loan  more  or  less  to  their  conditions.  This  happened  in 
the  Civil  War,  and  it  was  this  necessity  that  led  to  the 
national  banking  law,  which  was  an  effort  to  force  the 
banks  to  sustain  the  public  credit.  The  law  was  a  con- 
fession of  the  inability  of  the  government  to  get  on  with- 
out the  help  of  the  banks. 

The  amount  of  bonds  held  by  private  citizens  may  be 
fairly  regarded  as  a  measure  of  the  success  of  the  effort 
to  "diffuse"  the  loans  by  popular  subscriptions.  The 
figures  for  the  years  immediately  after  the  war  are  not 
available;  but  there  is  no  reason  to  think  that  the  analy- 
sis of  the  holdings  of  the  public  debt  made  in  the  cen- 
sus of  1880  represents  a  state  of  affairs  very  different  from 
that  which  originally  prevailed.  Professor  H.  C.  Adams 
summarizes  that  investigation  by  saying,  "  It  thus  appears 
that  out  of  a  total  of  over  one  billion  of  registered  debt, 
private  citizens  of  the  United  States  were  proprietors  of 
the  comparatively  small  sum  of  $417,538,850."  1 

The  dependence  of  the  government  on  the  banks  during 
the  Civil  War  was,  then,  real,  even  in  the  instances  in 
which  it  acted  as  its  own  broker,  because  it  had  to  turn 
to  the  banks  as  customers  for  its  issues  of  stock;  but  even 
this  amount  of  dependence  was  contrary  to  the  spirit, 
if  not  the  letter,  of   the  act  of   Aug.    6,   1846.      For  the 

1 "  Public  Debts,"  p.  45. 


108  THE  INDEPENDENT  TREASURY. 

whole  tenor  of  the  arguments  of  the  advocates  of  the  In- 
dependent Treasury  was  that  the  government  should  have 
nothing  whatever  to  do  with  the  banks. 

The  linking  of  the  affairs  of  the  government  with  those 
of  the  banks  may  be  shown  to  exist  in  other  ways  than  in 
mere  dependence  on  them  as  customers,  or  as  agents  for 
the  sale  of  bonds;  although,  to  be  sure,  this  close  connec- 
tion can  be  fairly  considered  as  only  an  incident  of  the 
banking  system  which  was  adopted.  Even  if  the  govern- 
ment had  not  sold  any  bonds  to  the  banks,  yet  those  insti- 
tutions must  have  bought  them  from  private  holders,  in 
order  to  deposit  them  with  the  United  States  Treasurer 
as  security  for  their  notes.  This  deposit,  as  is  well 
known,  makes  the  government  the  guarantor  of  the  bank 
notes;  and  a  connection  of  this  kind  is  unquestionably 
foreign  to  the  purpose  of  the  framers  of  the  Independent 
Treasury  law. 

Thus  by  the  exigencies  of  the  war  the  independence  of 
the  government  with  reference  to  banks  was  set  aside, 
both  formally  and  virtually,  in  the  matter  of  negotiation 
of  loans:  formally,  in  those  instances  in  which  the  gov- 
ernment employed  them  as  its  agents;  and  virtually,  even 
in  those  cases  in  which,  though  acting  as  its  own  agent 
or  broker,  it  still  had  to  rely  on  the  banks  as  the  imme- 
diate source  of  the  money  which  it  borrowed. 

It  may  be  said  that  the  necessity  for  relying  on  the 
banks  as  a  source  of  loans  was  a  mere  consequence  of  the 
conditions  of  the  war  and  not  a  defect  of  the  Independent 
Treasury  system.  But  it  must  be  insisted  in  reply,  first, 
that  these  conditions  are  similar  to  those  which  we  must 
expect  to  recur  if  we  should  be  unfortunate  enough  to  be 
involved  in  another  great  war;  and  second,  that  the  lack 
of  adaptability  of  the  fiscal  system  to  these   conditions 


THE   MANAGE  ME  XT  OF  LOANS.  109 

must,  therefore,  vitiate  the  system  and  render  it  unsuit- 
able in  a  great  war. 

The  use  of  the  banks  directly  or  indirectly,  for  floating 
loans,  was  the  first  step  in  the  abandonment  of  the  prin- 
ciple of  fiscal  independence  adopted  fifteen  years  before. 
The  second  step  followed  necessarily,  and  consisted  in 
once  more  making  the  banks,  to  a  certain  extent,  deposi- 
tories of  public  money.  Indeed,  the  circumstances  of  the 
situation  made  them  so  by  the  very  fact  of  their  receiving 
subscriptions  to  the  government  loans.  And  it  was  not 
long  before  the  general  suspension  of  specie  payments 
cut  away  the  foundation  of  the  act  of  1846,  so  far  also 
as  it  relates  to  the  use  of  "hard  money  "  in  government 
payments.  For  the  suspension  of  specie  payments  by  the 
banks  made  a  similar  step  a  matter  of  necessity  for  the 
government.  The  receipts  from  taxation  were  not  large 
enough  to  enable  the  Treasury  to  pay  all  its  debts  in  coin, 
and  the  banks  were  drained  of  their  gold  by  their  advances 
to  the  government,  which  the  Secretary  of  the  Treasury 
required  should  be  in  specie.  As  the  Secretary  could  not 
borrow  fast  enough  to  meet  his  needs,  and  as  he  could 
not  use  bank-notes,  government  paper  —  the  well-known 
"greenbacks"  — had  to  be  resorted  to. 

The  separation  of  the  government  from  the  banks  could 
not  prevent  a  suspension  of  specie  payments  by  the  gov- 
ernment, although  the  authors  of  the  law  of  1846  thought 
it  could.  They  made  provision,  indeed,  for  treasury 
notes,  but  these  were  always  to  be  equivalent  to  coin. 
But  with  the  greenbacks  even  the  pretence  of  specie  pay- 
ments was  soon  abandoned,  and  there  was  a  repetition  of 
the  old  lesson  in  monetary  science,  that  not  even  the 
power  of  a  great  government  can  keep  its  notes  equivalent 
to  coin  when  they  are  issued  in  excess.      Could  the  green- 


110  THE  INDEPENDENT  TREASURY. 

backs  have  taken  the  place  of  the  bank-notes  in  circula- 
tion, instead  of  being  added  to  them,  the  inflation  and 
depreciation  would  probably  have  been  less;  but  owing 
to  existing  laws,  and  to  the  state  of  public  and  Congres- 
sional opinion,  they  could  not  do  so,  and  hence  they  con- 
stituted a  clear  addition  to  the  circulating  medium  of  the 
country. 

During  the  Civil  War,  then,  the  Independent  Treasury 
law  was  really  inoperative.  It  was  entirely  so,  practically, 
except  for  the  maintenance  of  specie  payments  in  customs 
receipts  and  in  interest  on  the  public  debt;  and  it  was 
partly  so  even  according  to  law,  because  it  was  deemed 
necessary  to  suspend  certain  sections  of  the  sub-treasury 
act.1  The  very  purposes  for  which  the  system  was  cre- 
ated, separation  from  banks  and  maintenance  of  specie 
payments,  were  both  abandoned  owing  to  a  stress  of  cir- 
cumstances at  least  some  of  which  were  brought  about 
by  the  very  system  that  was  created  to  obviate  them,  the 
purpose  of  whose  establishment  was  to  render  them  im- 
possible. 

The  experience  of  the  Civil  War  would  seem  to  show, 
then,  that,  even  if  it  be  considered  best  for  the  public 
Treasury  to  negotiate  its  loans  directly  with  individual 
subscribers,  the  machinery  of  the  Sub-Treasury  is  entirely 
inadequate  to  enable  it  to  do  so  successfully  under  the 
stress  of  a  war,  and  that  the  system  is  not  a  guaranty,  as 
it  was  supposed  by  some  of  its  authors  to  be,  that  the 
government  would,  under  all  circumstances, be  freed  from 
the  evils  of  depreciated  paper. 

For  the  depositing  and  safe  keeping  of  internal  revenue 
receipts  also  in  time  of  war  the  sub-treasury  system  is 
unwieldy,  if  not  inadequate.     The  collection  of  the  great 

1  See  Appendix  p.  ii.  H. 


THE  MANAGEMENT  OF  LOANS.  Ill 

receipts  at  such  a  time,  by  means  of  a  complex  and  greatly 
ramified  system  of  taxation,  from  many  different  sources, 
and  from  points  often  remote  from  a  sub-treasury  or  a 
United  States  depository,  was  found  inconvenient  and  ex- 
pensive, and  also  dangerous,  because  the  money  had 
to  be  intrusted  to  inexperienced  collectors  often  hastily 
appointed.  These  difficulties  were  so  strongly  felt  that 
when  the  national  banks  were  established  they  were  made 
depositories  of  money  received  in  payment  of  internal 
revenue  taxes.  The  fiscal  growth  of  the  country  was  far 
beyond  the  confines  set  for  it  by  the  Independent  Treas- 
ury act.  The  channels  provided  by  the  system  were 
neither  sufficiently  large  nor  sufficiently  ramified  to  carry 
the  increased  streams  of  revenue  with  the  rapidity  neces- 
sary for  the  needs  of  government.  The  "boot"  system 
of  single-entry  book-keeping,  which  Mr.  Gouge  had  in 
1837  deemed  sufficient  for  the  fiscal  business  of  the  coun- 
try, needed  to  be  replaced  with  numerous  chests,  so  to 
speak,  and  with  a  system  of  double  entry. 

The  only  important  service  of  the  Independent  Treas- 
ury during  the  war  and  immediately  afterwards  was  to 
keep  the  supply  of  gold  received  in  payment  of  customs 
dues,  wherewith  to  pay  the  interest  on  the  public  debt 
during  the  period  of  paper  inflation.  In  supplying  the 
needs  of  the  government  in  this  respect,  the  Independent 
Treasury  performed,  of  course,  a  real  service.  But  this 
service  was  rather  an  accident  of  the  unsound  financial 
management  of  the  war  than  a  result  of  the  nature  of  the 
Independent  Treasury.  That  is,  if  the  financial  manage- 
ment of  the  war  had  been  such  as  to  render  unnecessary 
the  use  of  a  depreciated  paper  currency,  there  would  have 
been  no  call  for  this  service  from  the  Independent  Treas- 
ury.    Moreover,  in  so  far  as   it  absorbed  gold   beyond 


112  THE   INDEPENDENT   TREASURY. 

what  the  government  required  for  such  payments  as  had 
to  be  made  in  specie,  it  promoted  gold  speculation,  and 
so  caused  injury  to  legitimate  business. 

As  a  fiscal  engine  in  time  of  war,  then,  either  for 
the  placing  of  loans  or  for  the  collection  of  revenue,  the 
system  must  be  regarded  as,  on  the  whole,  a  failure.  As 
a  matter  of  reason  it  could  not  have  been  expected  to  do 
the  work  required  in  a  war  of  great  magnitude;  and  this 
rational  expectation  has  been  confirmed  by  the  experi- 
ence of  the  Civil  War.  Under  that  stress  the  machinery 
of  the  system  was  thrown  aside,  and  the  law  establishing 
it  became,  for  a  time  at  least,  a  dead  letter. 

More  can  be  said,  however,  in  favor  of  the  Independent 
Treasury  as  an  engine  for  the  performance  of  refunding 
operations,  although  even  for  that  purpose  it  is  not  wholly 
efficient,  at  least  for  operations  on  so  gigantic  a  scale  as 
that  which,  soon  after  the  war,  began  to  testify  to  the 
growing  credit  of  the  government  and  the  industrial  devel- 
opment of  the  country.  Here,  again,  as  in  the  placing 
of  loans  and  the  collection  of  revenue,  there  is  needed  a 
great  net-work  of  agencies  all  over  the  country,  and  this 
net-work  can  be  well  supplied  only  by  the  banks.  Secre- 
tary Sherman  wrote  in  1880 11  "Without  the  aid  of  the 
national  banks  the  unprecedented  refunding  operations  of 
last  year  would  have  been  almost,  if  not  quite,  impos- 
sible."  The  need  which  the  government  would  feel  for 
depending  partly  on  the  banks  in  measures  of  refunding, 
is  of  a  somewhat  different  kind  from  that  which  made 
them  indispensable  in  the  financial  operations  of  the  war. 
In  selling  bonds  for  refunding  purposes,  the  Treasury 
often  can  be,  to  advantage,  its  own  broker.  The  experi- 
ence of  Secretary  Sherman  shows  that  the   government 

1  Letter  to  the  Convention  of  American  Bankers,  1880. 


THE   MANAGEMENT  OF  LOANS.  113 

itself  could  place  bonds  on  the  market  at  less  expense 
than  if  it  sold  them  through  syndicates  of  bankers. 
"  Previous  to  the  summer  of  1877  all  operations  in  re- 
funding were  carried  on  by  syndicates,  the  commission 
allowed  being  the  total  amount 1  appropriated  by  the  law 
to  cover  the  expense  of  conversion.  .  .  .  But  when  Sec- 
retary Sherman  took  the  Treasury  portfolio,  the  plan  of 
placing  bonds  by  syndicates  was  abandoned  for  sale  upon 
public  advertisements,  or,  as  it  was  termed,  'under  circu- 
lars.' This  plan  was  followed  for  the  entire  amount  of 
four  per  cents,  with  the  exception  of  about  fifteen  million 
dollars,  which  were  secured  on  a  foreign  contract.  .  .  . 
The  success  of  the  policy  of  sale  by  circulars  maybe  seen 
from  the  following  facts :  The  total  sale  of  four  per  cent, 
bonds  amounted  to  $740,847,800;  the  cost  of  this  sale, 
according  to  the  plan  followed  by  the  other  Secretaries, 
would  have  been  $3,704,239;  by  the  method  adopted  by 
Mr.  Sherman  it  was  effected  at  a  cost  of  $2,645,802.60. 
The  teaching  of  this  experiment  is  .  .  .  that  in  matters 
of  administration  it  is  wise  for  the  government  to  keep 
itself  independent  of  the  agencies  of  the  banks.  Popular 
enthusiasm  brings  banking  support,  but  banking  enthusi- 
asm cannot  arouse  popular  interest.''2 

But  could  the  national  debt  have  been  so  easily  and  so 
soon  refunded  at  lower  rates  of  interest  if  the  national 
banks  had  not  furnished  a  ready-made  market  for  the  new 
bonds  as  a  basis  for  their  circulation?  There  is,  at  least, 
some  doubt  whether  it  could  have  been.  The  forced  market 
created  by  the  banks  for  the  bonds    enhanced  the   credit 

1  The  usual  rate  allowed  syndicates  for  placing  loans  during  the  war  was 
one  per  cent.     In  1870  it  was  reduced  to  one  half  of  one  per  cent. 

2  H.  C.  Adams's  "  Public  Debts,"  pp.  235-238.  Although  banking  sup- 
port may  not  arouse  popular  interest,  it  may  inspire  confidence. 


114  THE   INDEPENDENT   TREASURY. 

of  the  government,  and  enabled  it  sooner  to  command 
better  terms  for  its  loans.  The  difficulty  experienced  in 
1 89 1,  in  the  attempt  to  refund  the  three  and  one-half  per 
cent,  bonds  at  one  and  one-half  per  cent,  is  an  illustration 
of  the  point  under  consideration.  The  banks  refused  to 
exchange  the  bonds  they  held  for  others  at  less  than  two 
per  cent.,  and  the  Secretary  had  finally  to  adopt  that  rate. 
If  in  so  small  an  operation  as  this  one  was  the  Treasury 
had  to  accede  to  the  demands  of  the  banks,  certainly  it 
was  much  more  dependent  on  them  in  the  refunding 
operations  which  were  so  large  that,  if  the  banks  had  not 
had  their  own  terms  they  would  have  presented  their 
bonds  for  payment  and  seriously  embarrassed  the  govern- 
ment. 

Of  course,  if  the  refunding  operations  consisted  in  the 
mere  direct  exchange  of  bonds  between  holders  and  the 
government,  — that  is,  if  present  holders  were  willing  to 
give  up  their  stock  in  exchange  for  a  new  issue  at  a  lower 
rate  of  interest,  — the  transaction  might  be  regarded  as 
one  of  mere  book-keeping,  and  the  government  offices 
could  do  the  work  without  interfering  with  business.  But 
when,  as  was  the  usual  method,  new  bonds  must  be  sold 
for  cash  to  redeem  the  old  ones,  great  injury  might  be 
done,  by  contracting  the  currency,  if  the  money  paid  in 
for  new  bonds  had  to  lie  idle  in  the  vaults  of  the  Sub- 
Treasury,  to  await  the  maturity  of  the  bonds  called  in 
under  the  three  months'  notice  of  redemption  required  by 
law.  This  evil  could  be  obviated  under  the  independent 
method  of  placing  loans,  only  if  money  received  for  new 
bonds  were  paid  out  for  old  ones  as  fast  as  it  came  in. 
When,  however,  the  bonds  are  placed  through  the  banks 
the  money  paid  for  them  is  not  taken  from  the  channels 
of  commerce  at  all  for  any  considerable   length  of  time. 


THE  MANAGEMENT  OF  LOANS.  1 1  5 

Moreover,  here  again,  as  in  time  of  war,  the  large  stock 
of  money  is  held  by  the  banks,  or  can  be  most  easily 
brought  out  through  regular  banking  channels. 

As  illustrations  of  the  aid  rendered  by  the  banks  and 
bankers  in  refunding,  we  may  cite  some  of  the  operations 
between  1870  and  1879.  ^n  August,  187 1,  over  sixty- 
five  million  dollars'  worth  of  five  per  cent,  bonds  were 
subscribed  for,  "chiefly  by  the  national  banks."  In  the 
same  month,  the  firm  of  Jay  Cooke  &  Co.  contracted  for 
two  hundred  million  dollars'  worth  of  the  same  bonds. 
In  1876-77,  August  Belmont  &  Co.  purchased  four  and 
one-half  per  cent,  bonds  to  the  amount  of  two  hundred 
million  dollars.  During  the  first  four  months  of  1879, 
$497,247,750  worth  of  four  per  cents  were  sold,  one  hun- 
dred and  twenty-one  millions  being  taken  by  the  First 
National  Bank  of  New  York  and  associates,  and  the 
remainder  by  other  national  banks.1  It  is  needless  to 
mention  the  unprecedented  operations  in  debt  conversion 
in  still  more  recent  years.  In  all  of  them  the  assistance 
of  the  banks  was  indispensable. 

Thus,  again,  during  and  after  the  Civil  War,  as  after 
the  Revolutionary  War  and  that  of  18 12,  the  nation  was 
driven  to  avail  itself  of  the  aid  of  the  banks.  "The  first 
Bank  of  the  United  States  absorbed  nearly  one-fifth  of 
the  public  debt  in  1797.  The  second  Bank  of  the  United 
States  carried  about  the  same  proportion  of  the  debt  of 
1816.  When  the  Civil  War  closed,  in  April,  1865,  the 
newly  organized  national  banks  had  aided  the  Treasury 
in  placing  and  carrying  the  immense  loans  required  to 
maintain  the  armies  and  fleets  in  active  service  for  four 
years,  and  held  themselves  government  paper  to  the 
amount  of  $390, 000, 000."  2 

1  Report  of  the  Comptroller  of  the  Currency,  1S79.  p.  108. 

2  Richardson's  "  The  National  Banks,"  p.  112. 


Il6  THE   INDEPENDENT  TREASURY. 

A  break-down  of  the  Sub-Treasury  system  at  still  an- 
other point  became  manifest  when  the  country  came  to 
face  the  question  of  resumption  of  specie  payments.  The 
facts  show  that  if  the  Treasury  had  been  left  to  its  own 
resources, — that  is,  if  it  had  been  "independent,"  — 
resumption  probably  could  not  have  taken  place  when  it 
did.1  "In  the  resumption  of  specie  payments,  and  in  the 
funding  of  the  national  debt,  .  .  .  the  co-operation  of  the 
national  banks  has  been  of  essential  service  to  the  govern- 
ment. The  banks,  in  the  aggregate,  have  constantly  kept 
on  hand,  as  reserve,  nearly  one-fourth  of  the  entire  amount 
of  legal-tender  notes  outstanding,  which,  together  with 
the  coin,  is  much  in  excess  of  the  amount  of  the  reserve 
required  by  law."  2  The  connection  made  with  the  banks 
through  the  New  York  clearing-house  practically  relieved 
the  Treasury  of  the  necessity  of  making  coin  payments 
to  any  large  extent,  because  the  clearing-house  agreed 
to  accept  legal-tender  notes  in  payment  of  all  dues  from 
the  government.  Moreover,  the  banks,  although  holders 
of  more  than  one-third  of  the  amount  of  government  notes 
outstanding,  refrained  from  presenting  them  for  redemp- 
tion.3 If  the  banks  had  demanded  the  redemption  of 
these  notes,  the  attempt  at  resumption  would  have  been 
gravely  imperilled.  At  this  time  again,  as  in  the  case  of 
the  bonds  sold  to  carry  on  the  war,  the  banks  were  the 
only  source  whence  it  was  practicable  to  draw  large  sums: 
they  had  large  accumulations  of  gold,  and  were  the 
channels  through  which  more  could  readily  be  obtained 
by  means  of  subscriptions.      For   "  the   inconvenience  of 

1  For  an  account  of  the  operations  of  refunding  and  resumption,  see  Report 
of  the  Secretary  of  the  Treasury  on  !i  Specie  Resumption  and  Refunding  of 
the  National  Debt,"  Exec.  Docs.  46th  Cong.,  2d  sess.,  vol.  xvii.,  1879-S0. 

2  Finance  Report,  1879,  p.  20. 

3  Finance  Report,  1S79,  p.  114. 


THE   MANAGEMENT  OF  LOANS.  WJ 

obtaining  coin   outside  of    the    large   cities  forbade   any 
direct  appeal  to  the  great  body  of  the  people." 

But  in  still  another  way  was  the  aid  of  the  banks  ren- 
dered, a  way  which  made  them  an  essential  part  of  the 
resumption  machinery.  They  were  the  agents  of  the 
government  in  negotiating  the  loans  necessary  to  secure 
gold  for  specie  payments.  As  Secretary  Sherman  pointed 
out  in  the  letter  mentioned  before,1  but  for  the  use  of  the 
banks  as  depositories  the  money  received  for  bonds  would 
have  been  withdrawn  from  circulation  for  deposit  in  the 
Treasury  vaults,  to  await  the  maturity  of  the  bonds  called 
in.  The  banks  bought,  during  the  first  four  months 
of  1879,  nearly  five  hundred  million  dollars'  worth  of 
four  per  cent,  bonds.  The  absorption  by  the  Treasury 
of  all  the  money  thus  paid  in  would  have  contracted 
the  currency  of  the  country  over  fifty  per  cent.  Dis- 
tress was  caused  by  the  gradual  contraction  that  went 
on  for  the  five  years  preceding  resumption,  and  raised  an 
outcry  against  the  attempt  to  resume ;  such  a  contraction 
as  would  have  taken  place  had  all  the  money  paid  in  for 
the  new  bonds  been  kept  in  the  Treasury,  would  undoubt- 
edly have  caused  suffering  sufficient  to  arouse  against 
resumption  such  opposition  as  would  have  rendered  its 
success  at  least  problematical.  The  aid  of  the  banks 
here  was  absolutely  indispensable.  This  view  of  the 
case  is  not  weakened  by  the  fact,  sometimes  brought 
forward  to  belittle  the  aid  rendered  by  the  banks  at  this 
juncture,  that,  although  for  them  to  have  sent  in  their 
treasury  notes  for  redemption  would  have  been  to  destroy 
the  credit  of  the  government,  it  would  have  involved 
themselves  also  in  ruin.  For  the  dependence  of  their 
safety  on  that  of  the  government  was  a  condition  for 
1  See  p.  75. 


Il8  THE   INDEPENDENT  TREASURY. 

which  the  government,  and  not  the  banks  themselves,  was 
responsible. 

As  an  agency  for  the  fiscal  operations  during  and 
consequent  on  a  great  war,  it  is  evident,  then,  that  the 
Independent  Treasury  can  have  but  a  limited  scope, 
namely,  that  of  keeping  the  gold  wherewith  the  gov- 
ernment may  make  its  specie  payments.  But  it  can 
have  even  this  limited  scope  only  on  the  supposition  that 
the  country  is  on  a  paper  basis.  To  be  sure,  that  is  a 
condition  of  affairs  which  has  very  frequently  occurred  in 
countries  carrying  on  great  and  prolonged  wars ;  but  its 
necessity,  in  the  case  of  a  wealthy  country,  like  England 
or  our  own,  is  by  no  means  self-evident.  It  rather  seems 
possible  for  such  nations  to  maintain  specie  payments 
even  under  so  great  a  stress  as  we  endured  in  the  Civil 
War. 

If  better  financial  management  in  the  case  of  future 
wars  should  prevent  a  degeneration  to  the  use  of  irre- 
deemable paper,  even  the  present  restricted  possibilities 
for  usefulness  in  war  would  be  taken  from  the  Independ- 
ent Treasury.  A  state  of  war  is,  indeed,  exceptional ; 
and  the  fiscal  machinery  needed  under  its  conditions 
must,  as  a  matter  of  course,  be  exceptional  also.  But  the 
unusualness  should  not  lie  so  much  in  the  nature  of  the 
machinery  as  in  the  extent  of  its  operations.  The  crea- 
tion of  a  new  system  for  the  collection  and  disbursement 
of  revenue,  difficult  under  any  circumstances,  is  doubly 
so  under  the  strain  of  war,  and  should  be  unnecessary 
then.  If,  as  was  the  case  in  the  Civil  War,  specie  pay- 
ments be  suspended,  and  if  the  suspension  continue  after 
the  restoration  of  peace,  the  action  of  the  Independent 
Treasury,  as  already  pointed  out,1  is  to  absorb  gold.     The 

1  Page  in, 


THE   MANAGEMENT  OF  LOANS.  II9 

government,  under  such  circumstances,  receives  the  gold 
in  payment  of  duties,  and  as  no  one  wants  it  to  pay  debts 
that  can  be  legally  paid  in  depreciated  paper,  the  gold 
tends  to  accumulate.  The  result  must  be  a  tendency  to 
enhance  the  price  of  gold,  or,  what  amounts  to  the  same 
thing,  further  to  depreciate  paper.  This  tendency,  of 
course,  reacts  on  prices,  and  introduces  an  element  of 
uncertainty  into  business.  But,  in  addition,  such  locking 
up  of  gold  causes  speculation  in  gold  itself,  varying  its 
price  more  rapidly  and  largely  than  would  probably  other- 
wise be  the  case.  The  operations  of  the  New  York  Gold 
Board  furnish  an  illustration.  With  an  excellent  raison 
d'etre,  a  legitimate  field  for  its  operations,  it  became  at 
times  a  tool  which,  assisted  by  foolish  legislation,  exerted 
a  baneful  influence  on  the  business  of  the  country.  All 
these  considerations,  in  connection  with  the  fact  that  of 
the  four  great  wars  in  which  the  country  has  engaged, 
beginning  with  the  Revolution,  in  only  one,  and  that  the 
least  important  financially,  have  we  been  able  to  do  with- 
out the  aid  of  banks  and  bankers,  demonstrate  the  inade- 
quacy of  the  "  independent "  system  of  financiering  for 
war  purposes. 


120  THE  INDEPENDENT  TREASURY. 


CHAPTER   VI.1 

THE    INFLUENCE    OF    THE    INDEPENDENT 
TREASURY    ON    BUSINESS. 

THE  most  important  phase  of  the  operation  of  the 
Independent  Treasury  is  its  influence  on  the  busi- 
ness of  the  country  in  ordinary  times. 

In  the  investigation  of  this  part  of  the  subject  it  is 
both  desirable  and  necessary  to  confine  our  attention  to 
recent  years.  It  is  desirable,  because,  with  the  excep- 
tion of  about  a  decade  following  its  establishment,  the 
last  ten  or  twelve  years  are  the  only  ones  in  which  the 
Sub-Treasury  system  has  operated  in  a  way  that  may  be 
called  normal;  that  is,  under  conditions  which  have  not 
interfered  with  the  working  of  its  machinery.  It  is  ne- 
cessary, because  the  industrial  and  commercial  character 
of  the  present  period  of  normal  activity  of  the  Independ- 
ent Treasury  is  essentially  different  from  that  of  its  former 
period;  and  also  because  the  Sub-Treasury  as  it  exists 
to-day  is  a  very  different  institution  from  what  it  was 
forty  years  ago. 

For  many  years  after  the  adoption  of  the  system,  the 
annual  receipts  and  expenditures  of  the  government  were 
approximately  equal.  At  least  there  was  no  large  surplus 
to  deal  with,  such  as  for  many  years  past  has  been  one  of 
the  most  prominent  features  of  our  national  financiering. 

1  The  main  part  of  this  chapter  was  published  in  the  Annals  of  the 
American  Academy,  for  September,  1S92. 


ITS  INFLUENCE   ON  BUSINESS.  121 

This  is  an  important  consideration.  For  the  influence 
exerted,  on  the  amount  of  the  circulating  medium  for 
example,  by  a  government  which  keeps  its  own  money, 
must  be  very  different,  under  a  policy  of  surplus  finan- 
ciering, from  what  would  prevail  under  other  conditions. 
Moreover,  for  another  considerable  number  of  years,  the 
country  was  under  a  regime  of  paper  money,  issued  under 
circumstances  that  constituted  a  practical  reversal  of  the 
policy  of  complete  "divorce  of  bank  and  state  "  which 
was  the  central  doctrine  of  the  Independent  Treasury 
when  first  established;  so  that  the  Treasury  is  not  now 
"  independent "  even  to  the  extent  of  keeping  all  its  own 
money.  Again,  whatever  influence  such  a  system  would 
have  must  have  been  largely  increased,  if  not  changed 
in  character,  by  the  growth  of  the  fiscal  operations  of  the 
government,  by  the  industrial  and  commercial  development 
of  the  country,  and  especially  by  the  tremendous  growth  of 
credit  which  the  last  generation  has  witnessed. 

When  the  system  was  established  the  receipts  of  the 
government  were  about  one  million  dollars  a  week.  So 
unimportant  was  the  influence  of  the  government  opera- 
tions for  some  years  after  1846,  that,  in  the  words  of  Pro- 
fessor Sumner,1  "the  bankers  and  merchants  could  afford 
to  laugh  at  the  insignificance  of  the  government  on  their 
arena." 

Now  the  Treasury  "  is  the  largest  manipulator  of  money 
in  the  country."  Commerce  has  multiplied  many  times, 
and  there  is  a  greater  solidarity  of  business  interests,  due 
to  improved  means  of  communication,  and  a  correspond- 
ingly greater  sensitiveness. 

Moreover,  as  already  said,  the  functions  of  the  Inde- 
pendent Treasury  have  themselves  changed,  both  in  extent 

1  "  History  of  American  Currency,"  p.  167. 


122  THE  INDEPENDENT  TREASURY. 

and  nature.  "The  duties  of  the  sub-treasuries,"  said 
Treasurer  Jordan  in  1886,  "have  changed  since  the  pas- 
sage of  the  laws  authorizing  the  issue  of  the  various  kinds 
of  certificates  of  exchange,  and  redemption  of  the  silver 
coinage  and  paper  currency  of  the  country.  Each  sub- 
treasury  is  now  a  bank  of  issue  and  redemption.  Whether 
such  functions  should  be  performed  by  these  offices  is  a 
grave  question."  ' 

In  addition  to  its  intended  duties  of  receiving  and  dis- 
bursing government  money,  the  Independent  Treasury 
now  discharges  the  following  functions  also:  First,  it  issues 
notes,  like  a  bank,  and  it  protects  these  notes  by  keeping 
a  reserve  whose  ratio  to  the  notes  issued  approximates 
that  usually  kept  by  the  banks;  second,  it  receives  de- 
posits, and  issues  therefor  certificates,  which  pass  from 
hand  to  hand  as  money,  and  it  keeps  a  deposit  from 
which  to  cash  the  checks  of  disbursing  officers;  third, 
the  issue  of  government  paper  necessitates  the  duty  of 
redemption  by  the  Treasury  as  by  banks,  redemption, 
that  is,  in  the  sense  of  the  exchange  of  one  kind  of  money 
for  another;  and  it  also  acts  as  agent  of  the  national 
banks  for  the  redemption  of  their  notes;  fourth,  the  Inde- 
pendent Treasury  transfers  money  for  individuals  from 
one  part  of  the  country  to  another,  free  of  charge  or  at 
less  cost  than  can  be  done,  for  example,  by  the  banks ; 
and,  finally,  it  has  by  the  law  of  July,  1890,  been  charged 
with  what  is  essentially  the  work  of  a  silver  bullion 
broker.  These  powers  of  the  Independent  Treasury  must 
be  borne  in  mind  in  seeking  to  determine  the  nature  and 
extent  of  its  influence  on  the  business  of  the  country 
to-day. 

1  Treasurer  Jordan,  on  proposed  sub-treasury  at  Louisville.  Senate  Com- 
mittee Report,  No.  1834,  vol.  ii.,  second  session,  49th  Congress. 


ITS  INFLUENCE    ON  BUSINESS.  1 23 

It  may  seem,  at  first  thought,  that  this  influence  might 
be  directly  traced ;  that  prices  and  the  rate  of  interest 
might  be  shown  to  vary  with  the  absorptions  and  dis- 
bursements of  money  by  the  Treasury,  and  that  thus  there 
might  be  shown  to  exist  between  business  and  the  fiscal 
machinery  a  connection  so  close  as  to  amount  to  a  demon- 
stration of  the  influence  of  the  latter.  Unfortunately, 
however,  this  cannot  be  done;  for  large  amounts  of 
money  may  be  withdrawn  from  circulation  without  any 
apparent  effect  on  the  rate  of  interest,  or  on  business. 
This  is  possible,  because  under  our  currency  system  the 
volume  of  money  which  constantly  remains  in  our  chan- 
nels of  industry  is  nearly  a  maximum ;  that  is,  the  amount 
which  is  needed  and  used  when  business  is  most  active. 
This,  again,  occurs  because  our  currency  is  inelastic;  its 
contractions  and  expansions  are  not  to  any  great  extent 
in  response  to  the  needs  of  business;  it  is  not  self-adjust- 
ing. Hence,  when  business  is  dull  there  is  a  large  inac- 
tive volume  of  money  which  may  be  withdrawn  without 
affecting  the  business  situation.  Accordingly,  we  find 
that  the  amount  of  money  in  the  vaults  of  the  Treasury 
increases  sometimes  when  prices  are  rising,  and  some- 
times when  they  are  falling;  on  some  occasions  when  the 
rate  of  interest  tends  upwards,  and  on  others  when  it 
tends  downwards;  in  some  instances  when  business  is 
brisk,  and  in  some  when  it  is  dull;  at  times  when  gold 
is  being  exported,  and  at  times  when  it  is  being  imported. 
In  fact,  these  phenomena  occur  in  all  possible  combina- 
tions. 

Still  another  reason  why  prices  do  not  show  response 
to  changes  in  the  amount  of  money  caused  by  Treasury 
withdrawals  and  disbursements  is  found  in  the  widely 
extended  use  of  credit.     Credit  instruments  of  one  sort 


124  THE   INDEPENDENT  TREASURY. 

and  another  perform  a  very  large,  perhaps  the  larger,  part 
of  our  exchanges.  Prices  will,  therefore,  depend  more 
on  variations  in  the  amount  of  credit  than  of  the  money 
in  circulation. 

Moreover,  the  elements  that  enter  into  the  determina- 
tion of  prices  are  so  numerous,  so  variable,  and  sometimes 
so  obscure,  that  we  cannot  eliminate  those  which  are  not 
material  to  the  problem  of  finding  the  causes  of  variation 
at  a  given  time.  The  effect  of  any  one  of  these  numerous 
elements  may  in  one  case  be  much  greater  than  in  another, 
and  yet  it  may  not  so  appear  because  the  other  elements 
have  also  varied  in  the  mean  time.  Direct  proof  of  the 
effect  of  the  Sub-Treasury  on  prices  is,  therefore,  impos- 
sible. The  same  is  true  of  variations  in  the  rate  of 
interest.  So  far  as  they  are  caused  by  the  Independent 
Treasury,  they  are  due  to  the  changes  affected  by  it  in 
the  amount  of  loanable  capital.  But  usually  no  direct 
connection  can  be  positively  shown,  because  variations 
in  the  amount  of  loanable  capital  are  not  the  only  cause 
of  variations  in  the  rate  of  interest.  Loanable  capital 
may  diminish  while  the  rate  of  interest  falls,1  the  effect 
of  the  diminution  of  capital  being  more  than  offset  by 
other  causes,  which,  however,  are  undetermined,  and 
cannot,  therefore,  be  eliminated.  The  relations  between 
prices,  rate  of  interest,  loanable  capital,  and  the  opera- 
tions of  the  Treasury,  are,  in  fact,  exactly  such  as  could 
be  represented  by  a  combination  of  forces  acting  at  a 
single  point.  We  may,  by  observation,  determine  the 
amount  and  direction  of  the  resultant,  but  that  will  tell 
us  nothing  of  the  individual  forces.  To  see  whither  each 
tends,  we  must  imagine   it   acting  alone,  and   infer  the 

1  Cf.  E.  B.  Andrews's  "  An  Honest  Dollar,"  Publications  of  the  American 
Economic  Association,  vol.  iv.,  no.  6,  p.  8. 


ITS  INFLUENCE    ON  BUSINESS.  1 25 

results  of  its  single  action.  This  is  one  of  the  cases 
which  occur  so  often  in  social  and  economic  investiga- 
tions, whose  limitations  prevent  a  satisfactory  application 
of  the  inductive  method,  and  make  it  necessary  to  rely 
largely  on  deduction.  We  must  begin  by  assuming,  what 
all  admit,  that  prices  and  the  rate  of  interest  depend 
partly  on  the  amount  of  loanable  capital,  as  represented 
by  the  amount  of  money  offered  in  the  money  market,  and 
partly  also  on  the  extent  of  the  use  of  credit.  We  must, 
then,  first  examine  the  phenomena  of  the  Sub-Treasury 
considered  by  themselves,  and  afterwards  consider  how 
its  influence  is  modified  by  other  forces. 

The  influence  of  the  Treasury  on  business  is  exerted 
mainly  through  its  action,  direct  or  indirect,  on  the  pur- 
chasing medium  of  the  country.  If  we  disregard  the 
small  number  of  transactions  which  take  place  by  direct 
barter,  we  may  look  on  the  purchasing  medium  of  the 
country  as  a  compound  of  credit,  including  instruments 
of  credit,  and  money.  It  may  be  fairly  assumed  that  at 
any  given  moment  this  compound  purchasing  medium, 
or  the  "money  power,"  of  the  country  is  a  definite  quan- 
tity, the  amount  needed  to  perform  the  exchanges  that  take 
place.  It  may  vary,  owing  to  a  change  in  the  amount  of 
money,  or  of  credit,  or  of  both.  Any  external  cause  vary- 
ing the  total  purchasing  medium,  by  changing  either  the 
volume  of  credit  or  the  amount  of  money  in  circulation, 
will  tend  to  act  on  prices.  The  amount  of  the  compound 
purchasing  medium  required  for  transacting  business  being 
definite  at  any  selected  time,  if  the  volume  of  credit  remain 
constant,  a  sudden  diminution  of  the  amount  of  money  in 
a  market  will  tend  to  lower  prices,  or  at  least  to  prevent 
their  rise.  An  increase  in  the  amount  of  money  would 
have  the   opposite  effect.      After   each   variation    in    the 


126  THE  INDEPENDENT  TREASURY. 

amount  of  money,  prices  would  tend  to  settle  to  a  new 
level  determined  by  the  new  volume  of  the  compound 
purchasing  medium. 

But  because  the  volume  of  credit  is,  as  a  matter  of 
fact,  expansible  or  contractible,  part  of  the  effect  of  a 
variation  of  the  quantity  of  the  money  element  of  the 
compound  purchasing  medium  would  be  to  augment  or  to 
diminish  the  volume  of  the  credit  element.  For  the  more 
money  there  is  in  circulation  at  a  given  moment  the  less 
need  there  is  of  credit  operations;  and  the  less  money, 
the  greater  need.  This  is  true,  of  course,  on  the  suppo- 
sition that  the  total  compound  purchasing  medium  is 
exactly  what  is  needed  to  do  the  business  of  the  country 
at  the  given  time.  And  this  supposition  is  a  legitimate 
one,  so  long,  at  least,  as  the  country  is  on  a  specie  basis. 

If,  then,  we  suppose,  as  we  fairly  may,  that  the  rapidity 
of  circulation  remains  the  same  for  a  brief  period,  any 
cause  varying  the  amount  of  money  in  a  country  affects 
business  by  acting  on  prices  directly,  through  the  change 
in  the  quantity  of  money;  or  indirectly,  through  its  influ- 
ence in  inducing  a  change  in  the  volume  of  credit.  Prices 
would  be  affected  even  if  we  suppose,  what  in  practice 
could  hardly  be  realized,  that  the  expansion  in  the  vol- 
ume of  credit  equalled  the  diminution  in  that  of  money, 
for  the  effect  of  credit  on  prices  depends  in  part  on  its 
extent. 

Now,  the  action  of  the  Independent  Treasury  is  such  as 
to  vary  the  amount  of  money  in  circulation.  At  one  time 
it  absorbs,  at  another  disburses,  considerable  sums.  There 
is  nothing  in  the  nature  of  the  Sub-Treasury  that  makes 
its  receipts  and  payments  necessarily  concomitant  with  a 
free  and  a  stringent  condition  of  the  "money  market," 
respectively.      Its  action  is,  in  the  main,  independent  of 


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'  gain  or  loss  of  New  York  Sub-Treasury,  September, 


ITS  INFLUENCE    ON  BUSINESS.  I  27 

either  condition.  That  it  must  have  a  tendency  to  influ- 
ence prices,  depending  on  the  extent  of  its  absorption, 
retention,  and  disbursement  of  money  is,  therefore, 
clear. 

For  reasons  already  pointed  out,  it  is  difficult  to  show 
directly  the  connection  between  the  action  of  the  Sub- 
Treasury  and  variations  in  prices.  The  difficulty  is  still 
further  enhanced  by  the  fact  that  the  withdrawal  of  money 
from  circulation  must  continue  some  time  before  the  con- 
traction is  shown  in  market  quotations.  But  the  evils  of 
contraction  are  felt  long  before  they  become  manifest  in 
prices. 

The  table  on  pages  128  and  129  shows  the  net  weekly 
receipts  and  disbursements  of  the  sub-treasury  at  New 
York  from  September,  1890,  through  June,  1891.1 

In  the  ten  months  here  represented  there  was  a  contin- 
ual variation  in  the  amount  of  money  in  the  channels  of 
business,  due  to  the  ordinary  operations  of  the  sub- 
treasury  at  New  York.  It  poured  out  over  thirty-four 
millions  of  dollars,  net,  in  September;  withdrew  nearly 
eight  millions  in  the  following  two  months;  let  out  over 
six  millions  in  December,  and  in  the  last  four  months  of 
the  period  made  a  net  addition  to  the  money  afloat,  by 
its  ordinary  operations,  of  nearly  twenty-six  millions  of 
dollars.  The  changes  are  shown  graphically  in  the  dia- 
gram opposite.  All  points  below  the  line  represent  net 
loss,  and  all  above  it  net  gain,  for  the  sub-treasury. 
Each  square  running  horizontally  represents  two  weeks, 
and  vertically  one  million  dollars. 

1  The  figures  were  kindly  furnished  me  by  Mr.  Maurice  Muhleman,  cashier 
of  the  New  York  sub-treasury. 


1890. 

RECEIPTS  ] 

DISBURSE- 
MENTS 

NET  GAIN 

NET   LOSS 

BALANCE 
OF   GAIN 

BALANCE 
OF    LOSS 

Sept.    s 
"      12 

I4.I 
16.8 

14-3 
19.6 

— 

#2 
2.S 

— 

— 

"      19 

'9-5 

42.7 



23- ' 

— 



"     26 

17. 1 

25.6 



8-5 



— 

67.5 

102.2 

— 

34-6 

— 

34-6 

Oct.    3 

17-7 

16.6 

I.I 

— 





"     10 

18.3 

15.8 

2-5 

— 



— 

"     17 

I4.8 

14.0 

7 

— 



— 

"     24 

13-9 

12.5 

1.4 

— 



— 

"    31 

15.9 

14.8 

1.2 

— 



— 

80.6 

73-7 

6.9 

— 

6.9 

— 

Nov.    7 

J--3 

11. 1 

1.2 

— 





"     14 

137 

14.6 

— 

■9 



— 

"     21 
"     28 

14.6 

1 1.0 

14.5 
10.6 

.1 
•4 

— 

— 

— 

51.6 

50.8 

17 

•9 

.8 

— 

Dec.    5 

16.6 

130 

3-6 

— 

— 



"    12 
"    19 

13-5 

14.2 

22.5 
15.8 



9.0 
1.6 

— 

__ 

"    26 

12.7 

13.8 

— 

1.1 

— 

— 

"    31 

9.2 

7.2 

2.0 

— 

— 

— 

1891. 

66.2 

72-3 

5-6 

11.7 

— 

6.1 

Jan.    2 

11. 1 

8.9 

2.2 

— 

— 



"      9 

14.2 

15-5 

— 

'•3 

— 

— 

"    16 

15.0 

17.2 

— 

2.1 

— 

— 

"    23 

17-5 

17-7 

— 

.2 

— 

— 

"    30 

17. 1 

12.4 

4.8 

— 

— 

— 

74-9 

71-7 

6.9 

3-6 

3-3 

— 

Feb.    6 

13.6 

13.0 

.6 

— 

— 

— 

"      13 

16.9 

134 

3-5 

— 

— 

— 

"      20 

'3-3 

9.1 

4.1 

— 

— 

— 

"      27 

12. 1 

9-5 

2.6 

— 

— 

— 

55-9 

45.0 

10.8 

— 

10.8 

— 

Mar.    6 

13-3 

12.4 

•9 

— 

— 

— 

"      x3 

"      20 

12.8 
16.0 

14.9 
18.7 

2.1 

2.7 

— 

— 

"      27 

14-3 

14.8 

— 

•5 

— 

— 

56.4 

60.S 

•9 

5-3 

— 

4.425 

1  The  figures  are  in  millions  of  dollars. 


ITS  INFLUENCE    ON  BUSINESS. 


129 


1891. 

RECEIPTS  1 

DISBURSE- 
MENTS 

NET  GAIN 

NET    LOSS 

BALANCE 
OF  GAIN 

BALANCE 
OF    LOSS 

Apr.    3 

I4.6 

I5.0 

— 

•4 

— 

— 

"      10 

20.3 

22.2 



1.9 



# 

"      17 

177 

197 



2.0 



"      24 

I9.I 

2O.4 



i-3 





71-7 

77-3 

— 

5.6 



5.6 

Mav    1 

177 

17-5 

.2 

— 

— 



8 

19-3 

20.0 



■7 





"    is 

"     22 

23.2 
36.1 

23.8 
36.8 

— 

.6 
■7 



"     29 

22.3 

23-4 



1.1 





1 18.6 

121. 5 

.2 

3-i 

— 

2.9 

June    5 

26.6 

27.7 

— 

1.1 

— 

— 

"     12 

18.7 

21.7 



3-i 





"     19 

19.6 

^5-5 

— 

5-9 





"     26 

17-7 

20.6 



2.8 





82.6 

95-5 

— 

12.9 

— 

12-9 

So  great  an  irregularity  as  these  figures  show  in  the 
supply  of  money  cannot  but  have  a  tendency  to  render 
prices  also  irregular.  Of  course  the  effect  of  the  spas- 
modic variation  is  felt  first  in  speculation.  But  the  influ- 
ence of  speculation  on  prices  makes  itself  felt  all  through 
business,  if  the  variations  are  more  than  what  may  be 
called  momentary.  Every  business  man  who  has  out- 
standing debts  secured  by  bonds  or  stocks  as  collateral 
has  to  provide  additional  security  if  his  bonds  or  stocks 
depreciate  under  the  speculative  influence.  In  order  to 
do  so  he  may  have  to  reduce  his  capital,  or  curtail  his 
expenses,  or  sell  his  goods  at  a  loss;  and  the  solidarity 
of  business  interests  is  such  that  the  injury  to  one 
line  of  business  will  have  a  tendency  to  react  unfavorably 
on  others,  and  so  affect  a  large  part  of  the  community  or 
even  of  the  country. 

1  The  figures  are  in  millions  of  dollars. 


I30  THE   INDEPENDENT  TREASURY. 

Of  far  greater  importance,  however,  than  the  tendency  to 
influence  prices  by  varying  the  supply  of  money  directly, 
is  the  action  of  the  Independent  Treasury  system  on 
business  by  means  of  its  influence  on  credit  through  the 
medium  of  the  bank  reserves.  It  is  not  necessary  to 
enlarge  on  the  magnitude  and  importance  of  credit  op- 
erations in  the  business  world  to-day.  The  extent  of 
their  use  is  marvellous.  According  to  the  report  of  the 
Comptroller  of  the  Currency  for  1889-90,  it  appears  that 
of  the  receipts  of  3,364  national  banks  on  July  1, 
1890,  7.50  per  cent,  was  in  coin  and  paper  money,  and 
92.50  per  cent,  in  checks,  drafts,  bills  of  exchange,  and 
other  instruments  of  credit.  Corresponding  figures  for 
Sept.  17,  1890,  for  3,474  national  banks,  are  8.96  per 
cent,  in  "cash,"  and  91.04  per  cent,  in  "checks,  drafts, 
and  other  substitutes  for  money."  In  New  York  City, 
the  commercial  centre  of  the  country,  on  the  last  date 
given  above,  only  .07  of  one  per  cent,  of  the  total  transac- 
tions of  forty-seven  banks  was  in  coin;  4.29  per  cent,  was 
in  coin  certificates,  government  and  bank  notes;  and 
95.64  per  cent,  was  in  checks,  drafts,  and  other  substitutes 
for  money.  Now,  this  extensive  use  of  credit  is  perhaps 
the  most  marked  and  important  characteristic  of  the  busi- 
ness methods  of  our  industrial  era.  Credit  is  the  most 
important  means  of  business  expansion  and  of  industrial 
growth.  Its  destruction  would  mean  the  ruin  of  indus- 
trial development,  the  decrease  of  means  of  living,  the 
checking  of  population,  the  stagnation  of  social  life;  in 
short,  the  stoppage  of  progress  and  the  throwing  back  of 
the  world  to  a  more  primitive  type  of  civilization.  It  is 
the  very  life  of  modern  society.  Any  cause  that  injures 
it,  weakens  it,  or  temporarily  suspends  it,  is  an  economic 
and  social  evil.      But  the  basis  of  credit  in  the  business 


ITS  INFLUENCE    ON  BUSINESS.  I  3  I 

community  is  the  money  that  makes  up  the  bank  reserves. 
"The  whole  case  [of  the  influence  of  credit],  it  must  be 
observed,  rests  on  the  adequacy  of  tlie  reserve,  and  the 
reserve  must  be  judged  to  be  inadequate  unless  it  be 
sufficient  not  cnly  to  meet  every  demand  made  upon  it, 
but  completely  to  eliminate  all  apprehensions  on  that 
point.  Confidence  in  the  adequacy  of  the  reserve  is  the 
foundation  of  the  vast  superstructure  of  credit  which  is 
raised  upon  it,  and  confidence  cannot  be  impaired  with- 
out rudely  shaking  the  sensitive  fabic  it  supports."  1  The 
bank  reserves  are,  as  it  were,  the  base  of  an  industrial 
structure,  each  succeeding  layer  of  which  is  larger  than 
the  one  below  it,  so  that  the  business  organization  may 
be  represented  as  an  inverted  pyramid  with  a  very  small 
base.2     Such   a  system  is   evidently    in    a   condition    of 

1  Address  of  Mr.  Charles  Gairdner.  General  Manager  of  the  Union  Bank 
of  Scotland,  before  the  Institute  of  Scotch  Bankers,  quoted  in  Bradstreef 's< 
December,  1890. 

-  This  is  excellently  illustrated  by  Mr.  Edward  Atkinson  in  an  able  paper, 
in  Brads/reefs,  Dec.  20,  1890,  by  means  of  the  following  diagram  :  — 

AL 

Bl 

CL 

E| 

F 
G 

Rectangle  A  represents  the  approximate  estimate  of  all  trans- 
actions in  stocks,  bonds,  real  estate,  products  and  services,  $130,000,000,000. 

B  represents  that  of  all  transactions  on  credit 117,000,000.000. 

C  '•  '•     '•    '•    dealings  in  products 50.000,000,000. 

D  "  "     "    "    annual  production  @  $200  per  head       12,500,000,000. 

E  "  '•     •'    "    the  circulating  medium  in  country, 

Dec.  2,  1890 1.500,000,000. 

F  represents  that  of  the  lawful  money  not  in  banks      ....    1,000,000,000. 

G  "  "     "     "         "  "     in  th;  banks 300,000,000. 

Of  course  the  absolute  accuracy  of  the  figures  is  unimportant  it  the  ratios 
they  beai  to  <  ne  another  are  correct;  they  refer  to  the  United  States. 


I32  THE   INDEPENDENT  TREASURY. 

unstable  equilibrium.  But  the  industrial  pyramid  has  a 
certain  self-adjusted  proportion  of  the  parts;  so  long  as 
the  variations  in  the  base  are  induced  by,  and  therefore 
correspond  to,  variations  in  the  other  mutually  dependent 
parts  of  the  structure,  the  relative  stability  is  unchanged. 
In  other  words,  so  long  as  the  bank  reserve,  which  is  the 
base  of  the  pyramid,  adjusts  itself  to  the  legitimate  de- 
mands of  the  business  community,  so  long  is  there  equi- 
librium, or  no  disturbance.  But  the  slightest  disturbance 
of  the  base  threatens  the  whole  structure.  Any  diminu- 
tion of  the  bank  reserve,  independent  of  a  corresponding 
decrease  of  credit,  or  any  check  on  its  expansion  when  the 
needs  of  business  require  an  enlargement  of  credit,  inter- 
feres with  operations  in  every  department  of  business 
activity.  In  other  words,  so  small,  relatively,  is  the 
bank  reserve,  that  a  comparatively  slight  change  in  its 
amount  will  check  the  whole  market.  The  banks  in 
reserve  cities  are  required  by  law  to  keep  a  minimum 
reserve  of  twenty-five  per  cent  of  their  deposits  in  coin 
and  United  States  notes.  This,  then,  represents  the 
danger  line  in  fluctuations  of  the  reserve.  Even  a  mere 
approach  to  it  creates  anxiety  and  distress  in  business. 

The  amount  of  the  reserve  varies,  of  course,  with  the 
amount  of  the  cash  deposits,  and  also  with  the  amount  of 
discounts  or  loans.  For  a  borrower  at  a  bank  seldom  cares 
to  withdraw  the  actual  money.  He  borrows  credit.  The 
amount  of  the  loan  is  credited  to  him  on  the  books  of  the 
bank,  and  he  draws  on  it  as  he  needs  it.  No  more  money 
comes  into  the  bank  by  this  transaction;  no  money  at  all 
need  pass  from  the  bank  to  the  borrower  from  the  time  of 
the  contraction  of  the  debt  even  to  that  of  its  liquidation. 
Yet  the  transaction  is  equivalent  to  an  increase  of  depos- 
its, and  necessitates  an  increase  of  reserve.     If  the  reserve 


ITS  INFLUENCE   ON  BUSINESS.  I  33 

of  the  bank  is  already  at  the  legal  minimum,  the  bank 
must  get  more  money;  if  it  cannot  do  so,  it  must  con- 
tract its  loans,  or  at  least  refuse  further  discounts,  thus 
checking  the  market.  Money  which  is  withdrawn  from 
the  banks  must  come  out  of  the  reserve,  or  cash  actu- 
ally on  hand.  But  the  money  out  of  which  the  reserve 
must  be  maintained,  and  from  which  all  actual  withdraw- 
als and  cash  loans  must  come,  is  the  cash  deposits.  The 
"free"  cash,  that  which  the  bank  can  pay  out,  is  the 
difference  between  the  cash  deposits  and  the  minimum,  or 
legal,  reserve.  The  amount  against  which  the  bank  must 
maintain  a  minimum  reserve,  however,  is  composed  of  the 
cash  deposits ///at  credit  deposits,  or  loans  left  by  borrowers 
in  the  bank.  Evidently,  therefore,  the  withdrawal  of  any 
sum  of  money  from  the  bank  must  diminish  the  free  cash 
and  the  reserve  in  a  ratio  larger  than  that  which  the 
amount  withdrawn  bears  to  the  total  deposit  account. 
But  if  the  amount  withdrawn  is  kept  in  the  current  of  busi- 
ness where  the  banks  can  get  at  it,  they,  of  course,  can 
strengthen  their  position  again  immediately,  and  possibly 
could  always  keep  well  away  from  the  danger  line  of  a 
minimum  reserve.  If,  however,  they  cannot  recover  the 
money  let  out,  every  withdrawal  brings  them  nearer  to 
this  line.  Money  withdrawn  from  the  banks  for  export, 
or  for  the  payment  of  customs  dues,  is  thereby  put  out  of 
the  reach  of  the  banks,  for  a  time  at  least.  In  the  former 
case  a  firm  applies  to  the  bank  for  gold  certificates,  ex- 
changes them  at  a  sub-treasury  for  gold,  and  ships  the 
metal  like  any  other  commodity;  only  a  turn  in  the  tide 
of  international  exchange  can  restore  it  to  the  country 
and  the  banks.  If  the  money  is  used  to  pay  customs 
dues  it  goes  into  the  vaults  of  the  Sub-Treasury.  It  is 
here  as  much  out  of  the  reach  of  the  banks  as  when  it 


'54 


THE   INDEPENDENT  TREASURY. 


is  exported;  for  it  will  appear  again  only  when  the  gov- 
ernment has  payments  to  make,  or  becomes  a  purchaser 
of  its  own  bonds.  If  the  payments  of  the  government 
were  sufficiently  frequent,  or  if,  better  still,  they  had  a 
resultant  connection  with  the  operations  of  the  business 
community,  no  distress  would  be  felt. 

The  following  table  shows  the  changes  in  the  holdings 
of  the  New  York  Associated  Banks  for  three  months  in 
1890  due  to  the  action  of  the  Sub-Treasury  and  the  inte- 
rior movement  of  money,  and  also  the  changes  in  the 
total  reserve.1 


SUB-TREASURY 

INTERIOR 

NET 

GAIN  (X) 

VARIATION 

ACTION 

MOVEMENT 

OR 

LOSS    (  -  ) 

IN 

RESERVE 

Sept.  5,  1890 

X 

1 ,600.  2 

~      3.239. 

— 

1,689. 

— 

52- 

"    12,     " 

"    19.     " 

"    26,     " 

Oct.    3,     " 

X 
X 
X 
X 

2,600. 

13,700. 

18,500. 

4,500. 

-  3>3l°- 

-  4,411- 

-  3,933- 

-  5,7Si- 

X 
X 

710. 

9,289. 

14,567. 

I,28l. 

X 
X 
X 

3.193 

6,895 

16,384 

1,020 

"    10,     " 

"    17.     " 
"    24,     " 

- 

2.IOO. 
2,500. 

2,300. 

-  4,752- 

-  3.468. 

-  2,038. 

- 

6,852. 
5.968. 
4,338. 

- 

9,924 

4.3  I  I 

964 

"   3'.     " 

— 

700. 

—    2,290. 

— 

2,990. 

X 

207 

Nov.  7,     " 
"    14.     " 

X 

900. 

200. 

-      533- 
x    1,129. 

X 

1.433- 
I,329. 

X 

4.254 
292 

"    21,     " 

"    28,     " 

X 
X 

700. 

300. 

—  1,190. 

-  5i4- 

- 

490. 
214. 

300 
484 

It  is  evident  from  the  figures  that  there  is  no  causal 
connection  between  supplies  of  money  from  the  Sub- 
Treasury  and  the  demand  from  the  interior  points  of  the 
country,  so  that  the  drain  on  the  banks  by  the  interior 
movement  may  or  may  not  be  relieved  by  supplies  of 
money  from  the    Treasury.      Sometimes  the  two  move- 

1  The  table  is  compiled  from  the  weekly  returns  of  the  Commercial  and 
Financial  Chronicle.  The  X  sign  means  gain  to  the  banks,  and  the  —  sign 
loss. 

2  000  omitted  throughout. 


ITS   IXFLUEXCE    ON  BUSINESS.  135 

merits  are  in  the  same  direction,  either  towards  or  away 
from  the  banks,  and  so  intensify  each  other;  and  some- 
times they  partially  neutralize  each  other.  Through  the 
month  of  October  the  demand  for  money  from  the  interior 
continued  active,  but  the  banks  were  hindered  in  supply- 
ing it  by  the  steady  absorptions  of  the  Treasury.  Through 
September  the  demand  was  more  than  offset  by  the  Sub- 
Treasury  disbursements,  but  not  steadily.  In  November 
the  government  payments  partly  offset  and  partly  increased 
the  drain  on  the  banks  caused  by  the  interior  demand. 
It  would  be  rash  to  say  that  if  the  Sub-Treasury  had  not 
existed  the  banks  would  have  met  the  demands  for  money 
more  easily.  Under  ordinary  circumstances,  certainly 
under  ordinarily  good  management,  they  should  be  able 
to  anticipate  the  regular  autumn  draft.  But  in  a  period 
of  stringency  like  that  which  existed  in  the  fall  of  1890, 
the  case  might  be  different.  If  there  had  been  no  Sub- 
Treasury,  and  the  banks  had  had  the  money  held  there, 
they  would  of  course  have  loaned  it,  and  some  of  it,  with- 
out doubt,  would  have  been  difficult  to  call  in  when  the 
pinch  came.  The  Sub-Treasury  interposed  a  barrier  to 
free  lending,  and  held  the  money  for  a  time  of  greater 
need. 

The  diminution  of  the  bank  reserves  by  the  Sub-Treas- 
ury diminishes  the  money  basis  of  credit  and  thereby  at 
times  makes  credit  more  difficult  to  obtain;  but  at  the 
same  time  the  withdrawal  of  money  from  circulation 
necessitates  a  larger  resort  to  credit  in  the  attempt  to  pre- 
vent the  reduction  of  business  transacted.  That  is,  since 
one  part  of  the  compound  purchasing  medium  is  dimin- 
ished, the  other  must  enlarge  to  maintain  the  same  volume 
of  business.  Thus  the  tendency  of  the  action  of  the  Sub- 
Treasury  is  to  diminish  one  basis  of  business  activity  — 


I36  THE  INDEPENDENT  TREASURY. 

the  money  available  for  loans  —  and  so  to  compel  a  resort 
to  the  other  basis  —  credit;  while  at  the  same  time,  and 
by  the  same  action,  it  reduces  the  opportunities  for  get- 
ting credit.  The  result  is  a  check  on  business  expansion, 
perhaps  an  actual  reduction  of  business  activity. 

It  has  been  said  that  if  the  government  would  pay  its 
debts  so  as  to  avoid  having  a  surplus  on  hand  the  evil 
effects  of  the  Independent  Treasury  in  alternately  con- 
tracting and  expanding  the  currency  would  not  occur. 
This  statement  can  hardly  hold;  it  overlooks  the  charac- 
teristic feature  of  the  system,  namely,  its  irregularity  of 
action.  The  receipts  of  the  government  flow  into  its 
vaults  in  a  continuous  stream,  while  payments  are  peri- 
odic. It  receives  money  every  day,  but  the  bulk  of  its 
payments  is  made  every  three  months.  It  must  gather 
beforehand  a.  sufficient  amount  to  meet  its  payments.  That 
means  that  for  three  months  money  is  being  withdrawn 
from  circulation,  and  that  at  the  end  of  the  quarter  it  is 
thrown  back  into  circulation  and  into  the  banks  all,  or 
nearly  all,   at  once.     In  this  irregularity  1  of  action   on 

1  As  long  ago  as  1882,  the  Secretary  of  the  Treasury,  Mr.  C.  J.  Folger, 
emphasized  this  point,  in  his  report  for  that  year.  He  emphasizes  too 
strongly,  perhaps,  the  power  of  "cliques"  in  the  money  market ;  but  these 
certainly  have  been  at  times  powerful  for  evil,  and  their  power  has  been  in- 
creased, if  not  at  times  made  possible,  by  the  influence  of  the  Independent 
Treasury  on  the  currency.     Secretary  Folger  wrote :  — 

"  From  the  inequality  between  daily  large  receipts  and  comparatively  small 
daily  disbursements  there  comes  an  evil  effect  upon  the  business  of  the  coun- 
try. The  collections  by  the  government  are  taken  out  of  the  money  market  in 
sums  and  at  dates  which  have  little  or  no  agreement  with  the  natural  move- 
ment of  money,  and  are  returned  to  it  with  the  same  inadaptation  to  commer- 
cial or  financial  requirements.  Occasionally  the  large  disbursements  of  the 
government  have  created  a  plethora  of  money  ;  more  frequently  its  large  and 
continued  withdrawals  of  money  have  caused  such  a  scarcity  of  floating  capital 
as  to  check  the  proper  movement  of  legitimate  business.  It  is  not  only  that 
the  amount  in  the  Treasury  is  so  much  kept  from  the  use  of  [the]  commu-. 


ITS  INFLUENCE   OX  BUSINESS.  1 37 

the  money  market  lies  the  harm  of  the  system.  If  it  be 
said  that  the  payments  made  by  the  government  at  the 
end  of  every  three  months  amount  to  a  small  sum  com- 
pared with  the  total  circulating  medium,  and  therefore 
cannot  have  any  important  effect  on  business,  the  argu- 
ment is  conclusively  answered  by  the  evidence  of  experi- 
ence. In  the  first  place,  it  cannot  be  admitted  that  the 
disbursements  of  the  government  are  so  insignificant  as 
the  statement  seems  to  assume.  In  one  month  they 
may  be  small ;  in  another,  large.  If  we  observe  the 
gains  and  losses  of  money  by  the  sub-treasury  at  New 
York,  for  six  months  in  1890,  we  find  that  the  net  dis- 
bursements varied  from  over  thirty-four  million  dollars  in 
September  to  less  than  four  in  November.  The  former 
sum  is  about  one-third  the  usual  reserve  of  the  associated 
banks  of  New  York  City,  and  it  is  through  them  that  the 
bulk  of  the  payments  is  ultimately  made.  In  the  two 
weeks  from  the  T2th  to  the  26th  of  September,  1890, 
the  weeks  which  saw  the  heaviest  government  pay- 
ments of  the  month,  the  cash  holdings  of  the  banks  rose 
from  92.4  millions  of  dollars  to  115. 6  millions.  This 
increase  of  twenty-three  millions  was  in  spite  of  the  ship- 
ment of  8.3  millions  to  the  interior.  To  assert  that  such 
additions  to  loanable  funds  will  not  materially  affect 
business  is  to  assume  that,  other  things  being  equal,  the 
rate  of  interest  in  the  money  market  will   not  vary  with 

nity;  the  fact  becomes  an  incentive  and  an  aid  to  men  who  for  their  own 
ends  conspire  to  keep  from  that  use  other  large  sums.  .  .  .  To-day  there 
are  men  so  rich  that  by  conspiring  together,  they  can  at  will  put  and  hold 
hand  on  near  as  much  money  as  government  can  lay  hand  to,  save  by  the  use 
of  its  credit.  The  power  thus  had  is  used  from  time  to  time.  It  results 
that  sudden  and  violent  contractions  and  expansions  afflict  the  business  com- 
munity, and  the  government  is  an  unwilling  aider  and  abettor  therein.  It  has 
come  about  that  the  Treasury  Department  is  looked  to  as  a  great,  if  not  a 
chief  cause  of  recurring  stringencies,  and  the  Treasury  is  called  to  for  relief." 


138  THE  INDEPENDENT  TREASURY. 

the  amount  of  money  accessible  to  borrowers,  and  that 
the  banks  will  voluntarily  keep  idle  in  their  vaults  more 
money  than  it  is  necessary  for  conservative  banking.  The 
result  of  such  increase  in  the  money  accessible  to  business 
is  a  fall  in  the  rate  of  interest  on  short  loans,  and  at  least 
a  tendency  to  a  local  inflation  in  prices.  Mr.  Edward 
Atkinson  asserts1  that  the  removal  of  but  ten  per  cent, 
or  thirty  million  dollars  of  lawful  money,  from  bank  re- 
serves checked  three  billion  dollars'  worth  of  business 
transactions.  Even  if  not  prepared  to  admit  the  accuracy 
of  this  ratio,  and  although  it  is  true  that  a  given  amount 
of  contraction  will  disturb  business  much  less  at  one  time 
than  at  another,  we  must  still  admit  that  under  some  cir- 
cumstances the  effects  of  so  large  a  contraction  would  be 
very  injurious. 

In  the  summer  months  when  business  is  dull,  a  large 
amount  of  money  may,  as  we  shall  see,  be  accumulated 
in  the  Treasury,  with  no  ill  results,  because  it  is 
not  needed  then.  "  Contraction  of  the  currency  "  is  a 
healthy  occurrence  when  business  is  dull ;  and  in  the 
absence,  under  our  banking  system,  of  a  sufficiently  self- 
regulating  or  ''elastic"  currency,  the  action  of  the  Inde- 
pendent Treasury  then,  arbitrary  though  it  be,  is  a  good 
thing. 

But  even  the  smaller  output  of  four  or  five  millions  of 
dollars  may  have  an  important  influence  on  the  market, 
especially  if  the  bank  reserves  are  very  near  the  legal 
minimum;  for  contraction  then,  though  apparently  insig- 
nificant in  amount,  "may  produce  a  most  violent  reaction 
in  prices,  disturbance  in  settlements,  and  disorder  in 
almost  every  part  of  the  societary  movement. "  The  fol- 
lowing graphic  description  of  some  of  the  effects  of  a 

1  Brad  street's,  Dec.  1890. 


ITS  INFLUENCE   ON  BUSINESS.  1 39 

sudden  contraction  will  illustrate  the  importance  of  gov- 
ernment action  in  a  sensitive  condition  of  the  money 
market :  — 

"Early  in  1881  the  business  of  the  city  of  New  York 
was  disturbed  by  the  passage  of  an  act  of  Congress  which 
alarmed  the  banking  institutions.  It  matters  not  to  the 
present  purpose  whether  their  alarm  was  reasonable  or 
not;  the  point  here  to  be  considered  is  that  it  did  in  fact 
result  in  a  speedy  deposit  of  several  millions  of  legal 
tenders  with  the  Treasurer  of  the  United  States,  in  order 
to  provide  for  the  retirement  of  national  bank  circulation, 
and  thus  to  secure  the  immediate  surrender  of  the  govern- 
ment bonds  deposited  as  security.  Orders  for  such  de- 
posits of  legal  tender  came  by  telegraph  and  mail  from 
banks  in  all  parts  of  the  country  to  their  correspondents 
in  New  York.  These  orders  required  that  the  money  thus 
to  be  deposited  should  be  taken  from  the  sums  standing 
to  the  credit  of  the  country  banks  on  the  books  of  the 
banks  in  New  York,  and  forwarded  with  as  little  delay 
as  possible  to  the  Treasurer  of  the  United  States. 

"  It  afterwards  appeared  that  the  amount  of  legal  tenders 
thus  deposited  reached  about  seventeen  million  dollars 
within  one  week.  This  was  a  sudden,  but  not  very  large, 
contraction  of  the  currency.  The  amount  actually  in  use 
at  the  time,  including  all  kinds  of  money,  was  not  far 
from  one  billion  one  hundred  million  dollars,  so  that 
about  one  and  one-half  per  cent,  of  the  entire  circulation 
was  withdrawn  at  the  chief  centre  of  commerce.  What 
was  the  effect?  Immediately  the  banks  which  had  been 
called  upon  to  deposit  money  for  the  surrender  of  circu- 
lation took  the  required  amount  from  their  reserves.  But 
at  once,  being  required  to  make  good  those  reserves,  they 
sent  out  notices  demanding  the  payment  of  loans  on  call. 


I40  THE  INDEPENDENT   TREASURY. 

The  persons  thus  called  upon  unexpectedly  to  pay  sums 
which  they  had  invested  in  securities  rushed  first  to  other 
banks  and  to  brokers,  seeking  to  effect  new  loans.  As 
the  cause  was  one  which  influenced  at  the  same  time  the 
action  of  most  of  the  leading  banks  of  the  city,  a  contrac- 
tion of  loans  had  been  rendered  necessary  with  nearly  all 
the  banks,  and  the  apprehension  of  financial  disaster  had 
also  led  others  to  call  in  loans,  as  a  precautionary  meas- 
ure, and  had  rendered  all  less  disposed  to  put  out  more 
money  on  stock  collaterals.  As  a  consequence,  in  every 
direction  it  was  found  that  the  supply  of  money  available 
for  the  purchase  and  carrying  of  stocks  had  suddenly 
shrunk.  The  holders  were  forced  to  go  into  the  market 
to  sell.  .  .  .  Accordingly,  the  market  suddenly  became 
one  in  which  all  wanted  to  sell,  but  nobody  wanted  to 
buy.  .  .  .  The  inevitable  consequence  was  a  violent 
reaction,  and  the  decline  in  prices  within  about  one  week 
was  such  that  the  aggregate  market  value  of  securities 
handled  in  New  York  was  reduced  fully  two  hundred 
million  dollars.  [Of  course,  this  was  aided  by  the  panicky 
fear  of  future  evil.] 

"On  the  other  hand,  an  illustration  of  almost  weekly 
occurrence,  during  several  years  when  the  government 
was  rapidly  reducing  its  indebtedness,  will  serve  to  show 
the  effect  of  an  inflation  of  the  currency.  On  certain 
days  each  week,  about  twelve  o'clock,  messengers  from 
many  establishments  in  Wall  Street  were  waiting  at  the 
Sub-Treasury.  An  official  brought  out  and  posted  a 
written  notice,  announcing  that  the  government  would 
redeem  on  a  certain  date  bonds  amounting  to  ten  million 
dollars.  .  .  .  Within  five  minutes  orders  began  to  pour 
into  the  exchange  for  the  purchase  of  stocks.  At  the 
same  time  those  who  had  stocks  to  sell  were  warned  by 


ITS  INFLUENCE    ON  BUSINESS.  1 4! 

their  messengers  to  hold  them  at  high  prices.  A  sudden 
upward  rush  in  prices  occurred."1 

In  addition  to  the  bad  influence  of  the  irregularity  of 
the  working  of  the  Independent  Treasury,  harm  arises 
also  from  the  system  in  connection  with  the  policy  of 
surplus  financiering.  By  that  policy  a  large  amount  of 
money  collected  in  excess  of  the  expenses  of  the  govern- 
ment is  in  effect  withdrawn  permanently  from  circulation. 
If  the  government  has  a  surplus  every  month,  a  part  of  it, 
at  least,  must  be  continuously  in  the  possession  of  the 
government.  The  effect  is  the  same  as  if  so  much  money 
were  withdrawn  from  circulation  permanently.  The  result 
must  be  that  the  country  accommodates  itself  to  this  new 
monetary  basis  by  a  temporary  fall  of  prices,  unless  the 
circulating  medium  is  increasing  under  the  influence  of 
additional  coinage  with  sufficient  rapidity  to  prevent  the 
fall. 

Secretary  Fairchild,  writing  of  the  surplus,2  says:  "The 
government  provides,  at  large  annual  cost  .  .  .  that  there 
may  be  a  sufficient  circulating  medium  in  the  hands  of 
our  people.  ...  If  we  take  into  the  Treasury  large 
amounts  of  these  circulating  media  in  excess  of  what  we 
pay  out,  there  will  soon  not  be  money  enough  in  the 
hands  of  the  people  for  the  purposes  of  business;  serious 
derangement  and  disaster  must  follow,  and  a  portion  of 
labor  must  cease  until  the  very  evils  which  this  wrong 
condition  creates  shall  have  worked  a  temporary  cure  by 
so  diminishing  the  consumption  of  food,  clothing,  fuel, 
and  luxuries  by  the  taxation  of  which  the  revenues  of  the 
government  are  raised,  that  taxes  do  not  exceed  the  ex- 

1  "  American  Securities,''  Wm,  M.  Grosvenor  New  York,  1885.  pp. 
216-220. 

2  Report,  1S87. 


142  THE  INDEPENDENT  TREASURY. 

penditures  of  government."  Such  a  change  in  consump- 
tion as  Secretary  Fairchild  describes  would  happen  only 
in  an  extreme  case;  but  it  is  the  state  of  affairs  which 
the  Independent  Treasury  and  the  surplus  together  tend 
to  bring  about.  To  be  sure,  having  a  surplus  is  not  an 
essential  evil  of  the  Independent  Treasury  system.  The 
continual  holding  of  a  surplus  by  the  government  is  a 
policy,  not  a  system.  But  if  a  surplus  were  by  some 
means  kept  in  circulation,  subject  to  the  call  of  the  gov- 
ernment, the  evils  of  hoarding,  at  least,  would  be  avoided. 
It  is  because  it  makes  hoarding  in  the  government  vaults 
possible  that  the  Sub-Treasury  system  adds  to  the  evils 
of  surplus  financiering. 

The  operations  which  have  been  described  are  those 
which  would  result  under  a  system  of  government  finan- 
cial independence,  with  disbursements  made  at  consider- 
able intervals,  and  with  no  reference  to  the  condition  of 
the  money  market  or  the  demands  of  business.  Such  in 
principle  is  the  Independent  Treasury  system  of  the  United 
States.  But  the  existence  of  the  public  debt  and  the 
almost  constant  possession  of  a  surplus  revenue  have, 
under  wise  management  by  the  various  Secretaries  of  the 
Treasury,  made  it  possible  to  prevent  the  occurrence  of 
very  serious  disturbances  from  the  influence  of  the  system. 
If  this  influence  had  been  unchecked,  there  is  no  reason 
to  think  that  the  results  would  have  been  less  evil  than 
the  opponents  of  the  system  prophesied  at  its  inception. 
But  there  have  been  forces  at  work  that  have  lessened  the 
evils.  The  policy  of  the  country  in  other  lines,  although 
these  have  been  followed  without  any  reference  to  the 
Independent  Treasury,  has  been  such  as  to  prevent  the 
system  from  bearing  what  would  be  its  legitimate  fruits 
if  unchecked.     The  times  of  largest  receipts  from  customs 


ITS  INFLUENCE    OX  BUS IX ESS.  1 43 

and  of  largest  payments  of  interest  and  pensions,  the 
currency,  the  silver  purchases,  and  the  tariff,  have  all 
modified  the  working  of  the  system  of  fiscal  independence 
to  a  greater  or  less  extent.  It  has  happened  that  some 
of  these  influences  have  prevented  or  lessened  any  evils 
that  the  Sub-Treasury  might  have  caused. 

In  the  first  place,  the  tariff  and  the  Independent  Treas- 
ury have  a  certain  connection.  The  receipts  from  customs 
are  prohibited  by  law  from  being  deposited  in  the  banks. 
When,  therefore,  imports  which  are  subject  to  taxation 
are  heavy,  considerable  money  is  locked  up.  This,  of 
course,  if  continued  for  a  considerable  period,  and  if  dis- 
bursements did  not  increase,  would  diminish  the  means 
of  paying  duties,  and  might  strongly  affect  the  money 
market  and  disarrange  credit.  According  to  Professor 
Taussig,  the  tariff  act  of  1857  had  in  view  the  connection 
between  the  tariff  and  the  Sub-Treasury.  He  says:  "The 
tariff  was  passed  with  some  hope  that  it  would  serve  to 
prevent  the  [impending]  crisis.  Money  was  accumulating 
in  the  Treasury;  and  it  was  hoped  that  by  reducing  duties 
the  revenue  would  be  diminished,  money  would  be  got 
out  of  the  Treasury,  and  the  stringency,  which  was  already 
threatening,  prevented."1 

The  reduction  of  the  tariff  has  often  been  recommended 
as  a  means  for  preventing  the  withdrawal  of  money  from 
circulation.  It  is  evident  from  our  examination  of  the 
subject,  however,  that  the  relief  which  would  thus  be 
afforded  would  come  solely  from  the  abolition  of  a  surplus 
revenue.  This  would  not  do  away  with  the  irregularities 
of  action  of  the  Sub-Treasury,  which  constitute  the  really 
evil  feature  of  the  system.  A  surplus,  if  it  were  constant, 
and  fixed  in  amount,  could  be  allowed  for   in  business 

1  '•  Tariff  History  of  the  United  States,"  p.  118. 


144  THE   INDEPENDENT   TREASURY. 

transactions.  Its  creation  would  cause  a  temporary  con- 
traction of  the  currency,  but  the  currency  and  business 
would  soon  adjust  themselves  in  harmony  again,  and  busi- 
ness would  not  be  further  disurbed  so  long  as  the  surplus 
did  not  change.  The  existence  of  a  varying  surplus  is 
most  vicious.  But  the  varying  surplus  is  due  to  a  vary- 
ing revenue,  and  this  in  turn  to  the  varying  needs  of  the 
government  and  the  turns  of  business.  The  reduction  of 
the  tariff  so  as  to  abolish  the  surplus,  however  desirable 
for  other  reasons,  would  not  do  away  with  the  evils  caused 
by  the  Independent  Treasury,  because  it  would  not  make 
government  receipts  and  expenditures  any  more  regular. 

The  two  institutions,  tariff  and  Independent  Treasury, 
are  to  a  certain  extent  antagonistic,  in  so  far,  at  least,  a% 
the  tariff  is  for  the  purpose  of  raising  revenue.  For  by 
locking  up  the  customs  receipts  of  one  week,  and  thereby 
reducing  the  money  within  reach  for  further  payments, 
the  Sub-Treasury  will  tend  to  check  an  importation  move- 
ment sooner  than  it  would  cease  if  left  to  itself,  and  if 
our  currency  varied  with  the  needs  of  business.  So  far, 
however,  as  the  tariff  is  intended  to  check  importation — 
so  far,  that  is,  as  it  is  purely  protective  —  its  purpose 
harmonizes  with  the  action  of  the  Independent  Treasury. 

The  working  of  the  tariff  may  affect  the  Treasury 
through  the  relation  which  the  government  holds  to  the 
currency.  The  Treasury  must  always  have  on  hand 
enough  gold  to  maintain  payments  in  that  metal;  that  is, 
to  insure  the  redemption  of  the  United  States  notes  and 
the  silver  certificates.  But  if  imports  were  largely  to 
exceed  exports  for  a  considerable  time  there  might  be  a 
drain  on  the  gold  in  the  Treasury  that  would  make  it 
necessary  for  the  officers  of  the  government  to  take  meas- 
ures to  replenish  its  stock  of  gold.     This  would  "press  " 


ITS  INFLUENCE    ON  BUSINESS.  1 45 

the  banks  and  business,  increase  the  scarcity  of  money, 
raise  the  rate  of  interest  and  check  discounts,  tend  to 
depress  prices,  quicken  exportation  and  check  importa- 
tion, and  thus  restore,  on  another  level  of  prices,  the 
equilibrium  of  demand  and  supply  in  business.  The 
method  taken  to  replenish  the  gold  reserves  of  the  gov- 
ernment under  such  circumstances  would  depend  partly 
on  the  existence  or  non-existence  of  a  current  surplus. 
In  either  case,  of  course,  gold  could  be  purchased.  With 
a  surplus,  silver  certificates  might  be  allowed  to  accumu- 
late in  the  Treasury,  as  was  done  in  18S5.1  This  would 
soon  cause  the  receipts  of  the  government  to  show  a  larger 
proportion  of  gold,  and  so  restore  its  reserve.  If  there 
were  no  surplus  the  Treasury  would  have  to  buy  gold. 
Whichever  policy  were  adopted,  the  time  at  which  to  pur- 
sue and  to  relinquish  it  would  be  for  the  Secretary  of  the 
Treasury  to  determine.  His  duty  in  such  a  case  would 
have  a  certain  likeness  to  the  action  of  the  Directors  of 
the  Bank  of  England  in  raising  the  rate  of  discount  to 
check  the  export  of  gold.  The  object  of  both  is  to  pre- 
vent the  export  of  gold  from  going  so  far  as  to  endanger 
the  safety  of  their  loans.  Such  interference  in  this  coun- 
try is  very  rare,  and  together  with  the  exaction  of  a  pre- 
mium on  gold  bars  for  exportation  in  1890,  is  the  only 
means  taken  to  prevent  undue  loss  of  gold. 

The  hardships  caused  by  contraction  of  the  currency 
by  the  Sub-Treasury  at  a  period  of  heavy  importation 
would  be  mitigated  somewhat  by  the  bonded  warehouse 
system,  whereby  goods  may  be  kept  in  bond  and  the  duty 
paid  at  a  later  time.  This  system  gives  the  money  mar- 
ket time  to  prepare  for  the  demands  to  be  made  on  it. 

It  is  needless,  of  course,  to  point  out  that  the  evils  of 

1  See  Taussig's  "  Silver  Situation  in  the  U.  S.-'  Public,  of  the  Amer.  Econ. 
Assoc,  vol.  vii.  no.  1,  pp.  31,  ft. 


I46  THE  INDEPENDENT   TREASURY. 

contraction  caused  by  the  absorbing  action  of  the  Sub- 
Treasury,  at  a  period  of  heavy  importation,  are  followed 
in  due  course  by  the  evils  of  expansion.  These  latter 
are  likely  to  be  less  felt,  however,  than  the  former.  For 
the  contraction  takes  place  when  money  is  in  demand. 
If  the  expansion  take  place  at  such  a  time  it  eases  the 
market;  if  at  a  time  when  business  is  dull,  the  money 
simply  enters  the  volume  of  inelastic  currency  which  lies 
inert  in  the  channels  of  trade. 

It  has  already  been  several  times  observed  that  there 
is,  strictly  speaking,  no  causal  connection  between  the 
workings  of  the  financial  machinery  of  the  government 
and  the  demand  of  business  for  money.  Yet,  strangely 
enough,  the  ill  effects  of  the  receipts  and  payments  of  the 
government,  in  alternately  contracting  and  enlarging  the 
amount  of  money  available  for  business  purposes,  have 
been  modified,  and  to  a  certain  extent  diminished,  by 
our  peculiar  currency  system.  Bad  as  that  system  is  in 
some  respects,  it  must  be  credited  with  some  good  in  this 
direction.  The  chief  defect  of  our  monetary  system  is 
its  inelasticity.  The  supply  of  money  in  the  channels  of 
trade  is  that  which  is  needed  when  business  is  brisk  and 
the  demand  for  money  is  active  and  healthy.  But  there 
is  not  what  might  be  called  an  automatic  method  of  con- 
traction whereby  the  amount  of  money  in  circulation 
quickly  and  easily  becomes  less  when  business  becomes 
dull  for  short  periods.  Our  circulating  medium  is  com- 
posed of  gold  and  silver  coins  and  certificates,  United 
States  notes,  and  national  bank  notes.  The  United  States 
notes,  or  greenbacks,  are  by  law  fixed  in  amount;  the 
silver,  through  its  paper  representatives,  is,  also  by  law, 
continually  increasing;  the  gold  would  ordinarily  dimin- 
ish only  by  export  for  investment  or  for  the  settlement  of 


ITS  INFLUENCE    ON  BUSINESS.  1 47 

international  balances,  and  is  not,  therefore,  contractible 
on  the  occasions  under  consideration ;  and  the  national 
bank  notes  grow  less  only  by  the  slow  and  unimportant 
means  of  redemption  at  Washington  as  they  wear  out.1 
There  is,  then,  abundant  provision  for  currency  expan- 
sion, but  none  for  currency  contraction.  The  only  means 
whereby  this  process  can  take  place  is  through  the  absorp- 
tion and  locking  up  of  money  by  the  government.  But  this 
mode  is  of  course,  as  already  shown,  purely  arbitrary. 
Still,  it  sometimes  happens  that  the  government  locks  up 
money  at  a  time  when  there  is  a  plethora  in  the  market. 
The  process  cannot  then  do  much,  if  any,  injury;  in  fact, 
it  may  be  a  source  of  relief  to  the  banks.  The  monetary 
reservoir,  so  to  speak,  suffers  less  from  loss  through  the 
arbitrary  government  withdrawals,  because  it  is  always 
kept  at  or  near  a  maximum  fulness.  This  inelasticity  of 
the  currency  implies  a  social  loss,  by  keeping  afloat  at 
times  a  larger  amount  of  money  than  is  necessary;  but, 
on  the  other  hand,  it  lessens  the  severity  of  contraction 
by  the  Treasury. 

The  times  of  the  year  when  money  is  least  needed,  and 
when  it  accumulates  in  the  vaults  of  the  banks,  are,  ap- 
proximately, in  January,  the  summer  months,  and  towards 
the  end  of  October  and  the  beginning  of  November.  The 
plethora  of  currency  in  the  summer  is  due :  (1)  to  the 
semi-legal-tender  character  conferred  on  national  bank 
notes  by  the  law,  which  compels  every  bank  to  receive 
the  notes  of  every  other  bank  at  par.  The  consequence 
of  this  is  that  the  notes  of  the  country  banks  are  not  sent 
home  in  the  summer;  (2)  to  that  provision  of  the  law 
whereby  deposits  in  reserve  cities  count  as  reserve  both 

1  Of  course  the  final  retirement  of  the  national  bank  notes  is  not  a  phase  of 
the  elasticity  of  the  currency  here  intended. 


148 


THE   INDEPENDENT   TREASURY. 


for  the  reserve  bank  and  for  the  country  banks  making 
the  deposits ;  (3)  to  the  payment  of  interest  by  the  banks 
on  deposits  subject  to  call.  The  diagrams  pp.  149  and  150 
show  the  course  of  the  reserves  more  clearly.  The  figures 
from  which  the  curves  are  drawn  are  given  in  number  iv.  of 
the  Appendix.  The  first  cut  represents  the  monthly  move- 
ment of  the  surplus  reserve  of  the  New  York  Associated 
banks  for  the  years  1888,  1889,  1890,  1891;  the  second 
shows  the  course  of  the  average  monthly  surplus  reserve 
of  these  banks  for  the  four  years  named.  It  is  computed 
by  adding  the  figures  for  each  month  for  the  four  years 
and  dividing  by  4. 

No  one  is  benefited  by  the  seasons  of  extreme  ease;  for 
as  money  accumulates  in  New  York  only  because  it  is 
not  wanted  in  the  interior,  the  producing  and  mercantile 
classes  outside  of  New  York  get  no  benefit  from  the  low 
rates  of  discount  which  the  accumulations  produce.  But 
when  a  stringency  occurs,  on  the  other  hand,  it  generally 
affects  all.  The  injury  of  the  stringencies  is  not  com- 
pensated by  the  ease  of  the  money  market  at  the  times  of 
great  accumulation. 

The  following  diagram  shows  the  average  course  of  the 
monthly  receipts  from  customs  for  the  years  1888,  1889, 
and  1891.  The  year  1890  is  left  out  of  account  as  being 
somewhat  anomalous. 


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THE   INDEPEXDENT   TREASURY. 


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The  customs  receipts  rise,  as  the  chart  shows,  from 
May  until  September.  This  means,  of  course,  that  dur- 
ing the  intervening  months  the  government  is  locking  up 
money  and  contracting  the  currency.  This  action  must 
at  times  have  proved  a  relief  to  the  banks,  especially  in 
New  York  City,  by  withdrawing  a  part  of  the  money 
which  would  otherwise  have  lain  idle  in  their  vaults. 
But,  on  the  other  hand,  it  must  have  tended  to  render 
the  banks  less  able  to  meet  the  usual  fall  demand  for 
money  to  ''move  the  crops."  Indeed,  in  some  years,  as 
1888  and  1889,  "the  crop   movement    and  fall    business 


ITS  INFLUENCE    ON  BUSINESS.  I  5  I 

have  depended  wholly  upon  the  elasticity  government 
disbursements  have  given  the  currency.  .  .  .  There  was 
a  time  when  the  Treasury  accumulated  the  idle  currency 
in  the  summer  months  and  disbursed  it  in  the  fall."1 
Hence  it  has  been  necessary  at  many  times  to  rely  on  the 
Treasury  to  supply  the  whole,  or  the  greater  part,  of  the 
money  needed  to  keep  up  the  bank  reserves  when  they 
were  being  drained  by  the  interior  demand  in  the  fall. 
But  for  the  Independent  Treasury  the  autumnal  drain 
would  all  have  fallen  on  the  banks,  and  they  were  usually 
not  very  well  prepared  to  meet  it.  There  seems,  however, 
no  good  reason  for  thinking  that,  as  has  sometimes  been 
said,  the  banks  carelessly  depleted  their  reserves  by  dis- 
counting too  freely  in  the  summer  months,  and  that  they 
were  therefore  unable  to  meet  the  drain  in  the  fall. 
If  there  had  been  no  way  except  ordinary  payments  for 
the  Treasury  to  let  out  again  the  money  it  had  absorbed, 
evidently  distress  would  have  been  caused.  But  two 
channels  were  open  for  the  outflow :  in  the  first  place, 
the  Treasury  could  purchase  bonds,  and  this  was  the 
usual  policy  in  the  autumn  for  some  years;  in  the  sec- 
ond place,  the  accumulations  of  the  government  could 
again  be  put  within  the  reach  of  business  by  depositing 
them  in  the  banks.  This  policy  has  been  followed,  as 
we  have  already  seen,  to  a  greater  or  less  extent,  accord- 
ing to  the  views  of  the  different  Secretaries  of  the  Treas- 
ury. But  as  the  premium  on  United  States  bonds  has 
risen,  it  has  not  been  profitable  for  the  banks  to  buy  them 
for  deposit  as  security  for  government  money  committed 
to  their  care.  Moreover,  as  the  only  public  money  that 
can  legally  be  deposited  in  banks  is  that  derived  from 

l  N.  Y.  Commercial  and  Financial  Chronicle^  February,  1S90.     See  Ap- 
pendix, p.  vi. 


152  THE  INDEPENDENT  TREASURY. 

internal  revenue,  it  is  possible  that,  in  some  cases,  the 
receipts  would  come  in  so  slowly  that  the  banks  would 
lose  from  having  to  deposit  bonds  to  a  sufficient  amount 
in  advance. 

Still  another  preventive  of  stringency  in  the  fall  has 
been  found  in  the  timely  occurrence  of  the  heavy  govern- 
ment payments  for  pensions  and  interest.  Disbursements 
for  these  purposes  often  swelled  at  times  when  they  could 
do  great  good.  The  pensions  and  the  interest  on  the 
four  and  one-half  per  cent,  bonds  of  1891  were  payable  in 
March,  June,  September,  and  December,  and  were  a 
source  of  monetary  relief  that  could  be  depended  on.  The 
interest  on  the  four  per  cents  was  paid  in  January,  April, 
July,  and  October.  So  far  as  the  influence  of  these  pay- 
ments was  concerned,  that  of  October  would  continue 
the  relief  afforded  by  the  September  payments.  Now 
that  the  four  and  one-half  per  cent,  bonds  have  been 
paid,  there  will  be  no  further  relief  from  these  inter- 
est payments  in  September.  But  since  the  redemption  of 
these  bonds  it  has  happened  that  the  financial  condition 
of  the  government  has  changed.  The  receipts  from 
customs  have  fallen  off  owing  to  the  high  rates  of  the 
McKinley  tariff  law,  and  the  expenditures  have  largely 
increased,  thus  reducing  the  surplus  and  making  income 
and  outgo  more  nearly  equal.  The  equalization  of  pay- 
ments and  receipts  in  the  course  of  a  year  will  not,  how- 
ever, as  we  have  seen,  prevent  the  financial  operations 
of  the  government  from  exerting  an  influence  on  the 
money  market.  For  it  is  still  necessary  for  the  Treasury 
to  accumulate  in  advance  a  sufficient  amount  of  money  to 
make  payments  of  interest  and  pensions  quarterly.  The 
irregularities  of  its  operations  due  to  the  public  debt 
will   not,  indeed,  be  so  great  as  hitherto,  yet  they  may 


ITS  INFLUENCE   ON  BUSINESS. 


153 


be  sufficient  to  cause  occasional  disturbance.  The  only 
interest  payments  of  importance  are  those  on  the  four  per 
cent,  bonds,  due  in  January,  April,  July,  and  October  of 
each  year.  The  January  payments  come  at  a  time  when 
the  demand  for  money  is  slackened,  and  so  money  accu- 
mulates for  a  time  in  the  banks,  as  is  shown  by  the 
increase  in  their  reserves.  The  April  disbursements 
coincide  usually  with  the  demand  for  money  for  the  spring 
trade,  and  are  thus  a  positive  help  to  the  market.  The 
outpour  of  July  falls  on  a  lethargic  market  and  goes  to 
swell  bank  reserves  already  usually  larger  than  the  banks 
desire  at  that  season  of  the  year.  The  October  payment, 
as  we  have  already  noted,  is  timely  in  meeting  the  usual 
"fall  demand."  1 

l  The  average  course  of  government  disbursements  for  the  four  years,  1888, 
1889,  1890,  1S91,  is  shown  in  the  diagram  herewith  :  — 


31 

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154-  THE   INDEPENDENT   TREASURY. 

The  disbursements  for  pensions  increased  some  eigh- 
teen millions  of  dollars  for  the  fiscal  year  1891,  and  will 
increase  rapidly  for  some  years  to  come.  This  increase 
will  work  to  keep  up  the  irregular  influence  of  government 
financial  operations  in  the  money  market,  yet  possibly  to 
a  less  extent  than  hitherto.  For  a  new  policy  in  the 
payment  of  pensions  has  recently  been  adopted.  Pay- 
ment of  pensions  is  made  quarterly  from  each  pension 
agency,  as  heretofore,  but  not  from  all  the  agencies  at 
the  same  time.  Payment  is  made  from  some  agency 
every  month.  The  consequence  is  that  payments  of  pen- 
sions are  distributed  more  equably  through  the  year,  and 
therefore  they  will  doubtless  cause  less  disturbance  in 
the  future. 

In  its  connection  with  the  currency  the  Independent 
Treasury  is  the  source  of  another  danger.  It  is  due  partly 
to  the  existence  of  the  Sub-Treasury  system  that  the 
country  has  been  forced  into  its  present  silver  policy. 
The  sentiment  which  brought  about  the  effort  of  the  gov- 
ernment to  "  maintain  "  silver  could  not  have  been  so  suc- 
cessful but  for  the  fact  that  the  Treasury  is  the  keeper  and 
disburser  of  its  own  money.  If,  for  example,  the  trans- 
actions of  the  government  had  been  conducted  through 
a  national  bank,  as  formerly,  public  opinion  would  never 
have  permitted  so  long  a  period  of  irredeemable  paper  or 
a  forced  issue  of  depreciated  silver.  For  the  gain  from 
them,  whether  real  or  imaginary,  would  have  been,  at 
least  partly,  secured  by  the  bank.  But  the  issue  of  notes 
by  the  government,  and  the  forced  issues  of  silver,  receive 
a  certain  support  in  popular  opinion  because  the  profits 
accrue  to  the  government.  It  would  have  been  possible, 
under  a  system  that  used  banks  as  the  issuing  agents  of  the 
government,  to  secure  most  of  this  advantage  while  avoid- 


ITS  INFLUENCE    ON  BUSINESS.  I  55 

ing  the  incidental  evils  which  the  course  pursued  has 
produced.  It  is  not  meant,  of  course,  that  the  policy 
actually  pursued  with  reference  to  paper  and  silver  would 
have  been  impossible  under  a  national  bank;  but  it  would 
have  been  much  less  likely  to  be  suggested  or  supported. 
So  long  as  the  government  maintains  a  "bank"  of  its 
own,  so  long  will  its  stockholders,  the  people,  or  a  certain 
section  of  them,  insist  on  doing  for  profit  a  banking  busi- 
ness on  the  lines  which,  followed  too  far,  inevitably  bring 
disaster. 

Under  the  Independent  Treasury  system  the  govern- 
ment must  itself  maintain  the  gold  standard.  But  it  can 
do  so  only  if  its  receipts  are  in  gold  to  a  sufficient  degree. 
Professor  Taussig  shows  l  that  it  was  saved  from  forced 
silver  payments  in  1885  only  because  the  surplus  revenue 
enabled  it  to  accumulate  gold.  Now  that  the  surplus  is 
wiped  out,  this  source  of  safety  for  the  money  standard  is 
weakened,  and  the  difficulty  of  maintaining  the  standard 
will  increase. 

In  another  way  still,  the  surplus  has  prevented  the 
Independent  Treasury  from  exerting  the  full  effect  which 
it  would  otherwise  have  had.  While  the  surplus  is  to  a 
certain  extent  chargeable  with  intensifying  the  contrac- 
tions which  the  operation  of  the  Treasury  at  times  tends 
to  produce,  it  has  also  afforded  a  means  of  relief  when  the 
acute  stage  of  the  demand  for  money  has  come.  Without 
the  public  debt  and  without  a  surplus  to  redeem  it,  the 
Treasury  could  never  have  afforded  the  help  in  stringen- 
cies which  it  has  so  often  given.  But  this  very  cure  of 
the  evils  of  contraction  may  be,  to  a  certain  extent,  its 
cause.     A  surplus  can  exist  only  because  money  is  taken 

l  "  The  Silver  Situation."  Public,  of  the  Amer.  Econ.  Assoc,  vol.  vii., 
no.  1. 


156  THE  INDEPENDENT  TREASURY. 

out  of  circulation  and  locked  up  for  future  use,  a  process 
which  means  contraction.  The  evil  effects  of  the  sur- 
plus policy  in  contracting  the  currency  are  in  some  degree 
counteracted  by  the  arbitrary  enlargement  of  the  circulat- 
ing medium  from  the  monthly  additions  of  silver,  and 
from  other  new  coinage.  When  disbursements  come,  how- 
ever, inflation  is  rendered  still  greater  by  these  additions. 

If  the  currency  of  the  country  were  wholly  created  by 
commerce  for  its  own  needs,  adapted  entirely  to  those 
needs,  and  possessing  the  elasticity  which  such  a  currency 
would  have,  the  action  of  the  Independent  Treasury  would 
be  more  clearly  seen.  In  that  case  it  would  correspond 
more  exactly  with  the  absorptions  and  disbursements, 
diminutions  and  swellings,  of  the  money  in  circulation, 
for  short  periods  of  time.  The  new  coinage  made  in 
response  to  commercial  demand,  and  the  export  and  im- 
port of  gold  and  silver,  would  still  have  to  be  allowed 
for;  but  the  alternate  issue  and  redemption  of  bank 
notes,  under  such  a  currency  system  as  we  suppose,  would 
respond  quicky  to  the  variation  in  the  demand  caused  by 
the  Sub-Treasury,  and  so  would  reflect  its  action  much 
more  clearly. 

In  the  few  years  just  before  the  war,  when  the  currency 
was  more  elastic,  the  action  of  the  Sub-Treasury  on  the 
money  in  circulation  must  have  been  much  more  close 
and  direct.  At  that  time,  however,  the  financial  operations 
of  the  government  were,  comparatively,  so  small  that  the 
amount  of  its  alternate  subtractions  from,  and  addition 
to,  the  money  afloat  could  not  have  done  much  harm  ; 
and  since  the  war,  as  has  been  shown,  its  influence  has 
been  largely  modified  by  causes  many  of  which,  though 
they  would  be  called  bad  if  considered  by  themselves, 
have,  as  it  were,  so  considerably  offset  the  evils  of  one 


ITS  INFLUENCE    ON  BUSINESS.  I  57 

another  as  to  produce  a  condition  on  the  whole  not  very- 
vicious. 

Other  causes  which  prevent  the  variations  of  the  amount 
ot  money  in  the  channels  of  commerce  from  correspond- 
ing with  those  of  the  government  cash  holdings,  and  have 
modified  the  influence  of  the  Sub-Treasury,  are  the 
monthly  injection  of  silver,  the  changes  in  the  national 
bank  circulation,  and  the  exportation  or  importation  of 
gold;  and  even  when  allowance  has  been  made  for  all 
these,  the  effects  of  new  coinage  and  of  hoarding  would 
cloud  the  working  of  the  system.  The  combined  action 
of  the  silver  issues,  and  the  movement  of  the  national 
bank  notes,  sometimes  diminishes  very  much  the  contrac- 
tion which  government  receipts  would  otherwise  cause. 
For  example,  during  October,  1890,  the  gain  by  the  Sub- 
Treasury  amounted  to  $5,154,374.  But  not  this  amount 
was  lost  to  commerce  during  that  time.  For  during 
the  month  silver  certificates  were  issued  to  the  amount 
of  $5,880,000,  and  national  bank  notes  were  retired  to 
the  amount  of  $2,114,142.  The  net  gain  in  currency 
afloat  from  these  last  two  movements  was  $3,765,858, 
which,  deducted  from  the  Sub-Treasury  withdrawals, 
leaves  the  net  loss  of  money  afloat  $1,388,516.  If  the 
changes  in  the  currency  were  responsive  to  the  demands 
of  commerce,  as  they  would  be  under  a  monetary  system 
purely  commercial  instead  of  partly  political,  as  ours  is, 
the  demand  of  business  for  money  would  still  have  been 
unsupplied,1  by  just  the  amount  of  the  Sub-Treasury  with- 
drawals ;  under  our  system  the  occasions  when  money  de- 
mand and  money  supply  are  not  in  equilibrium  are  likely 
to  be  much  more  numerous.  At  the  time  mentioned  the 
demand  for  money  was  active  because  imports  were  rising 

1  On  the  basis  of  existing  prices,  of  course. 


158  THE   INDEPENDENT  TREASURY. 

to  anticipate  the  operation  of  the  McKinley  tariff,  and  it 
is  altogether  likely  that  the  whole  increase  of  money  dur- 
ing the  month  was  needed,  and  would  have  been  used, 
had  the  Sub-Treasury  not  put  it  out  of  reach. 

On  the  contrary,  it  is  clear  that  under  other  conditions 
—  when,  for  instance  the  demand  for  money  is  slack  — 
the  issue  of  silver  to  an  amount  greater  than  the  national 
bank  notes  retired  is  not  needed,  and  the  Treasury  ab- 
sorption relieves  the  plethora  of  currency.  But  which- 
ever way  the  changes  may  work,  there  is  no  necessary 
connection  between  the  money  demand,  the  money  supply, 
and  the  action  of  the  Sub-Treasury ;  that  action  is  there- 
fore just  as  likely  to  injure  as  to  help  the  market  for  the 
time  being. 

The  Independent  Treasury  also  enhances  the  difficulty 
of  the  management  of  the  public  debt.  The  Secretary  of 
the  Treasury  must  proceed  carefully  so  as  to  prevent  the 
withdrawal  of  too  much  money  for  the  accumulations  from 
which  to  pay  interest  and  to  purchase  bonds  for  the  sink- 
ing fund.  He  must  make  his  withdrawals  and  disburse- 
ments as  equable  as  possible. 

The  Independent  Treasury,  in  connection  with  a  sur- 
plus revenue,  is  responsible  for  the  policy  of  forced  debt 
payment.  When  the  surplus  grows  large  the  Secretary 
of  the  Treasury  is  compelled  to  get  rid  of  some  of  it  by 
purchasing  bonds,  even  though  he  must  pay  large  pre- 
miums to  do  so.  In  1889,  for  example,  the  Secretary 
received  and  disbursed  nearly  half  a  million  dollars  a  day, 
and  so  had  to  find  and  buy  one  or  two  millions  of  bonds  a 
week,  in  order  not  to  withdraw  a  dangerous  amount  of  cur- 
rency from  commerce.  A  possible  result  of  such  pur- 
chases is  to  raise  the  price  of  the  bonds  so  that  it  will 
not  pay  the  national  banks  to  deposit  them  as  security  for 


ITS  INFLUENCE    ON  BUSINESS.  1  59 

circulation ;  and  the  consequence  would  be  a  retirement 
of  bank  notes  and  a  contraction  of  the  currency,  or,  at 
least,  a  prevention  of  its  expansion  in  a  time  of  need. 

The  great  cause  of  mischief  in  the  Sub-Treasury  system, 
as  has  already  been  emphasized,  is  in  the  fact  that  while 
the  receipts  of  the  government  are  daily,  its  payments 
occur  only  at  intervals.  If  these  intervals  could  be  short- 
ened sufficiently,  the  harm  done  might  be  made  to  disap- 
pear; if,  for  instance,  the  Treasury  could  pay  its  bills 
weekly,  or  even  monthly,  its  influence  on  the  money 
market  would  be  far  less.  The  chief  items  in  the  irregu- 
larity of  the  treasury  action  are  pensions,  interest,  and 
purchases  of  bonds  for  the  sinking  fund.  With  regard  to 
pensions,  a  step  has  recently  been  taken  in  the  right 
direction  by  paying  part  of  them  each  month;  but  the 
great  increase  in  the  pension  roll  will  neutralize,  at  least 
in  part,  the  benefit  that  the  change  would  otherwise  pro- 
duce. The  interest  payments  are  still  made  quarterly, 
and  money  must  be  gathered  for  the  purpose,  and  also 
for  the  purchase  of  bonds.  As  the  debt  grows  less 
the  influence  of  these  payments  on  the  money  market 
will  decrease.  If  Congress  could  be  said  to  have  a  defi- 
nite financial  policy,  so  that  the  action  of  one  session 
could  be  looked  on  as  indicative  of  its  future  course,  we 
might  infer  from  recent  legislation  that  the  irregularities 
due  to  debt  payment  will  be  less  than  hitherto.  For  the 
late  drift  of  events  —  the  enlargement  of  appropriations 
and  the  reduction  of  income  by  the  McKinley  tariff  — 
might  then  be  regarded  as  foreshadowing  a  period  of  slow 
debt  reduction.  This  would  preserve  somewhat  longer 
our  national  banking  system,  and  would  enable  the  gov- 
ernment, if  so  it  chose,  to  make  a  larger  use  of  these 
banks  as  depositories,   and   the  slower  payment  of   the 


l6o  THE   INDEPENDENT  TREASURY. 

debt  could  be  so  adjusted  as  to  cause  less  irregularity. 
But  no  such  dependence  can  be  put  on  Congressional 
action  as  to  warrant  an  inference  like  this. 

The  causes  which  have  modified  the  action  of  the  Sub- 
Treasury  have  prevented  the  monthly  variations  in  the 
net  government  holdings  of  cash  from  corresponding 
necessarily  with  the  gain  or  loss  of  money  to  business 
from  government  operations.  Hence,  one  set  of  changes 
cannot  always  be  learned  from  the  other.  The  difference 
between  the  two  sets  of  changes  is  often  increased  by  the 
fact  that  the  disbursements  reported  as  being  made  in  one 
month  may  not  appear  until  the  following  month.  The 
checks  issued  for  pensions,  for  example,  are  some  time 
in  returning  through  the  banks  to  the  Sub- Treasury  for 
payment.  Meantime  the  money  against  them  remains 
still  in  the  vaults  of  the  Treasury.  The  effect  of  large 
reported  disbursements  or  absorptions  may  not  appear, 
therefore,  for  some  little  time  after  they  are  nominally 
made.  For  example,  in  March,  1889,  the  decrease  in  the 
Sub-Treasury  holdings  was  $31575,519;  the  decrease  in 
depository  bank  holdings  was  $986,743  ;  total,  $4,562,262. 
Yet  according  to  the  monthly  statement,  the  receipts  of 
the  Treasury  were  $31,014,000;  and  the  disbursements, 
$17,383,000.  These  figures  make  it  appear  that  the 
Treasury  absorbed  $9,139,000,  whereas  it  actually  had  a 
net  loss  of  $4, 562, 262. 1 

We  see,  then,  that  the  evils  which  the  Sub-Treasury 
might  naturally  be  expected  to  produce  have  been  largely 
neutralized  by  a  series  of  lucky  accidents,  as  it  were; 
for  it  can  hardly  be  claimed  that  the  various  parts  of  our 
financial  system  and  policy  have  been  framed  with  refer- 
ence to  one  another  so  as  to  offset  one  another's  ill  effects 

1  See  also  page  S9. 


ITS  INFLUENCE    ON  BUSINESS.  l6l 

and  produce  a  system  good  on  the  whole.  Several  parts 
of  that  system  are  bad,  notably  our  currency  and  the  Inde- 
pendent Treasury,  in  some  of  its  influences.  Yet  they  have 
to  a  certain  extent  corrected  one  another.  We  can  hardly 
expect,  however,  that  the  balancing  of  these  influences 
against  one  another  can  continue  in  the  future,  nor  would 
it  be  desirable  that  it  should.  It  would  be  unscientific 
and  dangerous  to  rely  on  mere  contingencies  for  the  pre- 
vention of  financial  evils,  if  we  can  see  the  defects  in  our 
system  and  provide  a  remedy. 

Irregularities  of  absorption  and  disbursement  cannot 
be  prevented.  They  occur  with  all  governments.  It  is 
not  practicable  for  the  government  to  pay  its  bills  with 
sufficient  frequency  to  prevent  the  locking  up  of  consider- 
able sums  for  periods  long  enough  to  affect  the  market, 
especially  when  it  is  sensitive.  This  feature  of  temporary 
withdrawals  of  money  is  inherent  in  the  "  independent ,; 
system  of  government  management  of  its  own  receipts. 
and  renders  impossible  the  prevention  of  the  evils  which 
arise  from  contractions  and  expansions  of  the  currency 
that  are  independent  of  the  state  of  trade.  Some  method 
of  keeping  the  public  money  should  therefore  be  sought 
which  will  do  away  with  these  evils. 


1 62  THE  INDEPENDENT   TREASURY. 


CHAPTER   VII. 

THE    RELATION     OF   THE    INDEPENDENT    TREAS- 
URY  TO   CRISES. 

IT  remains  to  trace  the  influence  of  the  operation  of  the 
Independent  Treasury  under  the  unusual  conditions 
of  a  monetary  stringency  or  crisis.  At  such  times,  when 
the  crisis  becomes  acute,  the  business  community  is 
accustomed  to  look  to  the  Treasury  for  lrlief,  and  on  sev- 
eral occasions  this  relief  has  been  obtained.  When  credit 
has  been  strained  to  its  utmost,  and  has  been  on  the  point 
of  breaking  down,  when  the  money  basis  of  the  industrial 
pyramid  has  become  too  narrow  and  too  weak  to  support 
the  great  fabric  reared  upon  it,  then  the  accumulated 
surplus  of  the  government  has  been  poured  through  the 
doors  of  the  Sub-Treasury,  and  has  saved  business  from 
a  collapse.  This  is,  of  course,  a  real  benefit,  and  it  is 
pointed  to  as  an  advantage  of  the  system. 

The  policy  of  government  action  in  times  of  commercial 
distress  is  not  new.  Our  people  have  long  relied  on 
Washington  for  aid  in  such  difficulties,  and  especially 
since  the  "divorce  of  bank  and  state,"  which  was  pro- 
claimed to  be  a  necessary  part  of  "government  by  the 
people."  "It  has  been  the  uniform  policy  of  the  govern- 
ment, when  possible,  in  all  commercial  crises  from  1846 
to  the  present  time."  1 

There  are  several  ways  in  which  the  power  of  the  gov- 

1  Secretary  Windom  :  Report,  1S90. 


ITS  RELATION   TO   CRISES.  1 63 

ernment  has  been,  or  may  be,  brought  to  bear  in  a  crisis. 
A  government  whose  fiscal  operations  are  independent  of 
banks  may  relieve  a  protracted  stringency  by  requiring 
dues  to  it  to  be  paid  in  coin.  Under  the  influence  of  such 
a  requirement  specie  will  be  drawn  from  hoards,  or  from 
abroad,  and  the  government  can  then  put  the  metal  in 
circulation  by  means  of  its  disbursements.  At  least  a 
part  of  the  specie  so  disbursed  will  be  likely  to  remain  in 
circulation.  And  even  if  it  should  not,  its  transitory  cir- 
culation will  accomplish  some  good. 

Again,  the  government  may  exercise  a  restraining 
influence  on  the  banks,  retarding  discounts  and  so  check- 
ing speculation,  by  absorbing  for  a  time  more  money  than 
it  disburses;  it  may  cheapen  domestic  exchange  by  itself 
doing  a  transfer  business  at  low  rates  or  even  gratuitously, 
thereby  promoting  the  flow  of  money  from  places  where 
it  is  abundant  to  places  where  it  is  scarce:  it  may  supply 
money  by  anticipating  payments  of  interest  on  its  debt, 
by  adapting  other  payments  to  the  condition  of  the  market, 
and  by  the  purchase  of  bonds:  it  may  deposit  the  public 
money  in  banks,  and  allow  the  banks  to  use  the  deposits 
as  a  basis  for  making  loans;  and,  finally,  it  may  offer  to 
increase  the  supply  of  currency  by  converting  interest- 
bearing  bonds  into  non-interest-bearing  treasury  notes. 
This  last  method  has  never  been  used  in  this  country, 
although  something  analogous  to   it   was    advocated    in 

1S73-1 

When  the  country  was  laboring  under  a  suspension  of 
specie  payments  by  the  banks,  under  the  administration 
of  President  Van  Buren,  there  is  no  doubt  that  by  the 
payment  of  its  ordinary  obligations  in  specie  the  govern- 
ment exerted  an  influence  in  putting  in  motion  a  small 

1  See  Adams's  "Public  Debts."  pp.  214.  215. 


1 64  THE  INDEPENDENT  TREASURY. 

stream  of  the  metals,  which  "gradually  assumed  larger 
dimensions,"  and  furnished  a  measure  of  relief.  The 
action  of  the  government  at  this  time  was  beneficial  in 
two  ways:  it  relieved  the  stress,  and,  by  its  method  of 
doing  this,  promoted  the  restoration  of  specie  payments. 

To  be  sure,  the  Independent  Treasury  was  not  estab- 
lished at  this  time,  yet  it  virtually  existed;  for  on  the 
occurrence  of  the  suspension  in  1837  only  six  banks  main- 
tained specie  payments  and  so  continued  to  be  government 
depositories;  and  while  the  Secretary  of  the  Treasury  was 
unable  to  find  banks  in  which  he  could  legally  deposit, 
he  kept  part  of  the  public  money  on  special  deposit  in 
Washington,  while  the  rest  was  left  in  the  hands  of  the 
collecting  officers.1 

The  panic  of  1S37  was  hastened  and  intensified,  in 
this  country,  by  the  great  inflation  of  the  currency 
which  occurred  under  the  influence  of  the  ''mushroom 
crop "  of  banks  that  sprang  up  immediately  after  the 
downfall  of  the  United  States  Bank.  The  bank  paper  in 
circulation  increased  from  eighty-two  million  dollars  in 
January,  1835,  t0  one  hundred  and  eight  million  dollars 
in  January,  1836,  and  to  one  hundred  and  twenty  million 
dollars  in  the  following  December.  Within  the  same 
period  the  per  capita  circulation  grew  from  seven  dollars 
to  nearly  ten  dollars.  The  specie  in  the  banks  rose  only 
two  millions  in  the  meantime,  and  that  in  circulation 
increased  from  eighteen  to  twenty-eight  millions.  Thus 
the  currency  was  almost  entirely  bank  paper;  and  when 
the  bubble  of  speculation  built  on  it  burst,  many  of  the 
notes  became  worthless,  and  most  of  them  very  much  de- 
preciated. So  great  was  the  burden  of  dishonest  credit 
that  resumption  would  have  been  exceedingly  difficult  for 

1  Finance  Report,  1837. 


ITS  RELATION  TO   CRISES.  1 6$ 

the  banks  had  they  been  unaided.  But  the  government 
receipts  and  payments  were  by  law  required  to  be  in 
specie,  or  in  treasury  notes  equivalent  to  specie,  and  a 
steady  stream  of  good  money  was  thus  kept  in  circu- 
lation, part  of  which  was  within  reach  of  the  banks, 
and  undoubtedly  made  their  task  of  resumption  easier. 
The  specie  drawn  out  by  the  government  demand  must 
have  come  from  hoards,  or  must  have  been  imported,  and 
so  formed  a  clear  addition  to  the  metallic  currency  afloat. 
The  government  furnished  a  superior  currency  which  com- 
peted with  the  bank  notes  and  to  a  certain  extent  restrained 
them. 

However,  the  conditions  which  prevailed  at  that  time 
were  such  as  need  not  now  be  contemplated.  A  general 
failure  to  redeem  the  bank  notes  of  the  country,  so  long 
as  there  is  no  suspension  of  specie  payments  by  the  gov- 
ernment, is  now  impossible,  certainly  in  a  time  of  peace; 
and  there  are  many  reasons  for  doubting  whether,  under 
modern  industrial  and  commercial  conditions,  suspension 
i3  necessary  in  a  great  and  strong  country  like  the  United 
States,  even  in  a  time  of  war. 

At  the  time  we  are  considering,  the  banks  could  pro- 
mote speculation  both  by  over-issues  of  notes  in  "cash" 
loans,  and  by  book-credit  discounts.1  It  was  with  the 
"  cash  "  loaned  by  the  banks  that  the  specie  of  the  govern- 
ment came,  so  to  speak,  into  competition  for  use,  and  so 
tended  to  restrain  it.      But  an  over-issue2  of  notes  could 

1  That  is,  the  banks  made  loans  both  in  the  form  (if  credit  on  their  books, 
and  in  the  form  of  actual  cash,  so  called.  The  latter  consisted  of  the  bank"s 
own  notes  ;  and,  in  many  cases,  banks  extended  their  loans  of  this  kind  to 
indefinite  amounts,  by  issuing  notes  without  regard  to  the  amount  of  their 
reserves. 

'  The  over-issue  here  meant  is  an  issue  unduly  large  in  proportion  to  the 
reserve.     The  issues  of  the  old  State  banks  were  "  over  '"-issues,  both  iH  this 


1 66  THE  INDEPENDENT  TREASURY. 

not  occur  under  our  existing  currency  system,  because 
notes  are  not  issued  against  deposits  but  against  capital ; 
and  hence  speculation  cannot  be  promoted  in  that  way. 
Even  if  it  could,  no  competition  between  government  cur- 
rency and  bank  currency,  on  the  score  of  the  greater 
security  of  the  former,  could  take  place  now,  because  the 
bank  notes  are  virtually  government  notes;  therefore  the 
bank  issues  could  not  now  be  restrained  by  such  a  com- 
petition. So  far  as  the  banks  foster  speculation  under  the 
present  law,  they  do  it  by  book-credit  discounts  based  on 
their  deposits,  and  the  Independent  Treasury  can  check 
their  operations  only  by  absorbing  the  specie  which  would 
otherwise  go  into  their  reserves.  Consequently,  whenever, 
under  present  conditions,  government  disbursements  of 
specie  are  a  source  of  relief  in  crises,  they  are  so,  not 
because  they  bring  specie  into  circulation  to  replace  dis- 
credited paper,  but  simply  because  they  put  back  into 
circulation  what  they  have  previously  withdrawn,  and  so 
restore  the  volume  of  currency  to  a  correspondence  with 
the  more  active  demand  for  money.  The  mode  of  relief 
which  came  in  1837  from  the  government  insisting  on 
receiving  and  disbursing  only  specie  is,  therefore,  not 
possible  now. 

sense  and  in  the  sense  that  they  were  more  than  enough  to  meet  the  need  for 
money  for  purposes  of  legitimate  business.  An  over-issue  in  this  latter  sense 
would  be  possible  even  under  a  system  of  notes  secured  by  government  bonds. 
It  could  occur,  for  instance,  if  the  amount  of  notes  permitted  to  be  issued  were 
considerably  more  than  the  par  value  of  the  bonds,  or  if  the  amount  of  issue 
were  equal  to  the  par  value  of  the  bonds,  and  the  bonds  were  greatly  depre- 
ciated. In  either  case  there  would  be  a  wide  margin  of  notes  practically 
unsecured,  which,  under  favorable  conditions  therefor,  might  be  forced  into  cir- 
culation. This  would  constitute  an  "  over-issue,r'  and  would  promote  specula- 
tion. But  the  actual  restrictions  of  our  banking  law  preclude  the  occurrence  of 
such  conditions.  Moreover,  since  the  bank  notes  are  redeemable  by  the  gov- 
ernment, and  supported  by  the  credit  of  the  government,  they  are  as  good  as 
government  notes  themselves,  and  would  not  suffer  from  competition  with 
them. 


ITS  RE  L  All  OX    TO    CRISES.  1 67 

The  second  mode  in  which  the  Independent  Treasury 
may  exert  a  beneficent  influence  in  a  crisis  is,  as  has  just 
been  said,  by  exercising  a  restraining  influence  on  the 
banks.  The  theory  of  this  action  is  that  by  absorbing 
money  the  Treasury  makes  it  harder  for  the  banks  to  get, 
and  that  they,  in  consequence,  do  not  discount  so  freely. 
Speculation,  therefore,  it  is  argued,  is  checked  and  the 
crisis  is  so  far  retarded.  Of  course  any  effect  of  this  kind 
is  produced  only  if  the  current  receipts  of  the  government 
exceed  its  expenditures;  that  is,  if  a  surplus  is  accumu- 
lating. There  is  no  doubt  that  under  proper  conditions  the 
influence  exerted  by  the  Sub-Treasury  in  this  way  would 
be  beneficial.  If  the  government  were  absorbing  money 
at  a  time  when  business  was  entering  on  a  stage  of  specu- 
lation that  was  forcing  up  prices,  evidently  there  would  be 
two  sources  of  drain  on  the  money  market;  namely,  that 
caused  by  speculative  borrowers,  and  that  caused  by  lock- 
ing up  money  in  the  Treasury.  The  existence  of  the  lat- 
ter would  prevent  the  former  from  going  as  far  as  it 
otherwise  would  do ;  for  it  would  diminish  the  bank 
reserves,  and  so  raise  the  rate  of  discount,  and  make 
borrowing  more  difficult.  The  result  would  be  a  dimi- 
nution of  loans  to  speculative  buyers,  which  would  cause 
them  to  lessen  their  demand  for  the  commodities  in  which 
they  were  speculating,  and  so  retard  the  inflation  of 
prices.  Some  such  influence  was  exerted  in  1854.  The 
bank  circulation  then  was  set  at  $204,689,209,  and  the 
gold  and  silver  in  the  country  at  $241,000,000.*  The  ten- 
dency was  for  the  bank  paper  to  drive  specie  from  circula- 
tion; but  the  requirements  of  the  government  for  specie 
had  a  counteracting  effect.  The  receipts  of  the  Treasury 
amounted  to  over  seventy-five   million  dollars,  in  coin, 

1  Finance  Report,  1854,  p.  15. 


1 68  THE   INDEPENDENT  TREASURY. 

for  the  fiscal  year  1854,  and  this  had  an  influence  that 
"kept  up  the  demand  for  coin,  and  prevented  the  bank 
circulation  from  obtaining  the  mastery."  When  the 
Independent  Treasury  works  so  as  to  produce  such 
results  it  is  to  be  commended.  This  restraining  influ- 
ence on  the  banks  is  what  Secretary  Guthrie  had  in  mind 
when,  in  his  report  for  1855-56,  he  wrote:  "The  Inde- 
pendent Treasury,  when  over-trading  takes  place,  gradu- 
ally fills  its  vaults,  withdraws  the  deposits,  and,  pressing 
the  banks,  the  merchants  and  the  dealers,  exercises  that 
temperate  and  timely  control,  which  seems  to  secure  the 
fortunes  of  individuals,  and  preserve  the  general  pros- 
perity." While,  however,  we  may  readily  admit  that  the 
action  of  the  Independent  Treasury  sometimes  produces 
such  results,  yet  whether  it  actually  does  so  in  any  given 
crisis  is  a  question  of  fact  to  be  proved;  and  that  it  might 
operate  in  an  opposite  way,  intensifying  the  distress,  and 
making  the  crisis  more  acute,  is  a  possibility  that  must  be 
recognized  and  its  conditions  defined.  What  these  con- 
ditions are  will  appear  when  we  examine  the  general 
effects  of  the  sale  of  bonds  for  the  relief  of  the  market. 

On  the  face  of  the  matter  it  would  seem  that  perhaps 
the  simplest  and  most  obvious  way  for  the  government  to 
give  relief  in  a  crisis,  is  for  the  Treasury  to  deposit  its 
money  in  the  banks.  This  does  not  mean  depositing  in 
ordinary  times  when  business  is  quiet;  that  is  a  matter 
which  will  be  considered  in  another  connection.  The 
deposits  here  meant  are  deposits  of  surplus  revenue  for 
the  express  purpose  of  relieving  the  business  community 
in  a  financial  storm. 

There  are  certain  objections  to  such  a  mode  of  afford- 
ing help  to  business  when  it  is  distressed.  In  the  first 
place,  the  only  deposits  of  considerable  amount  that  can 


ITS  RELATION  TO   CRISES.  1 69 

be  made  in  the  banks,  under  the  law,  are  receipts  from 
internal  revenue;  it  is  not  the  practice  to  transfer  money 
already  in  the  Treasury  or  a  Sub-Treasury  for  deposit  in 
the  banks.  Consequently  the  deposits  would  come  into 
the  banks  too  slowly  to  be  of  much  use  in  meeting  a  panic. 

There  is,  however,  a  still  more  serious  objection  to  the 
deposit  of  the  public  money  in  banks  for  the  purpose  of 
aiding  an  embarrassed  market.  Under  our  present  usury 
law  no  bank  which  received  such  deposits  could  raise  its 
rate  of  discount  above  the  legal  rate  in  the  State  in  which 
the  bank  is  located.  The  banks  could  not,  therefore, 
unless  by  evasion  of  the  law,  apply  the  well-known  rule 
to  discount  in  the  face  of  a  panic  freely,  indeed,  but  at  a 
rate  of  discount  that  rises,  within  certain  limits,  as  the 
stress  increases.  Hence  the  limit  of  help  which  the  banks 
could  give  with  the  public  money  deposited  with  them 
would  be  the  relief  of  a  strain  whose  intensity  would  be 
measured  by  that  rate  of  discount,  supposing  the  law  were 
not  evaded.  The  demand  for  loans  at  six  or  seven  per 
cent.,  the  usual  legal  limits,  would  be  very  large,  and  all 
the  money  to  loan  would  soon  be  absorbed,  a  large  part 
of  it  by  those  whose  financial  salvation  did  not  depend 
on  getting  it;  while  others  who  were  on  the  brink  of 
ruin  would  be  unable  to  borrow,  even  although  they 
could  and  would  have  paid  a  higher  rate  of  interest,  had 
the  law  allowed,  by  outbidding  those  who  were  not  really 
in  dire  need  of  the  money.  If,  on  the  other  hand,  the 
banks  charged  higher  rates,  public  opinion  would  not 
tolerate  at  all  the  free  use  of  the  public  money  by  them. 
Furnishing  relief  to  the  money-market  by  depositing  the 
public  money  in  banks  cannot,  then,  be  very  serviceable, 
under  existing  conditions. 

The  other  methods  mentioned  as  being  at  the  command 


170  THE  INDEPENDENT  TREASURY. 

of  the  Treasury  for  influencing  the  money  market  are  rather 
methods  of  direct  relief  than  methods  of  prevention,  palli- 
ative rather  than  deterrent.  They  partake,  indeed,  of  both 
characteristics;  for  aid  in  transfers,  the  "timing"  of  in- 
terest and  other  payments,  and  the  purchase  of  bonds,  may 
be  utilized  in  anticipating  commercial  distress.  Gener- 
ally, however,  they  have  been  measures  of  relief  when  the 
storm  was  on. 

By  the  timing  of  payments  is  meant  simply  that  a  cer- 
tain latitude  is  observed  in  paying  debts.  There  are 
generally  some  debts  the  payment  of  which  can  legiti- 
mately be  hastened  or  deferred  for  a  short  period  like 
a  few  weeks.  The  plan  in  practice  has  consisted  in 
throwing  the  payments  of  one  month  into  the  month  fol- 
lowing. Thus  in  the  latter  part  of  November,  1889, 
the  Secretary  of  the  Treasury  1  issued  a  large  number  of 
transfer  checks  so  late  in  the  month  that  they  could  not 
well  be  returned  for  payment  until  December.2  But 
December  is  a  month  in  which  money  is  usually  in  great 
demand,  and  the  throwing  of  the  November  disbursements 
into  December  helped  to  keep  the  market  more  equable 
than  it  would  have  been  otherwise. 

When  disbursements  have  been  hastened  by  the  Treas- 
ury for  the  purpose  of  assisting  the  money  market  they 
have  generally  taken  the  form  of  prepayments  of  interest 
on  the  public  debt.  Such  prepayments  have,  at  times, 
done  some  good,  but  for  affording  relief  to  any  great 
extent  they  cannot  be  relied  on.  This  plan  "must  always 
be  a  lame  method  for  relieving  the  government  of  its 
surplus,  unless  the  inducement  offered  is  greater  than 
now,  as  it  interferes  with  the  free  sale  of  bonds."  3 

1  Mr.  C.  S.  Fairchild. 

2  See  New  York  Commercial  and  Financial  Chronicle,  Jan.  5,  1890,  p.  4. 
8  Commercial  and  Financial  Chronicle,  Sept.  17,  1887. 


ITS  RELATION   TO    CRISES.  \Jl 

It  is  unfortunate  that  the  government  should  be  com- 
pelled to  resort  to  such  paltry  practices  in  consequence 
of  defective  financial  machinery.  The  whole  process  of 
"timing"  payments  is  too  artificial  to  be  commended. 
It  ought  not  to  be  necessary.  Government  payments 
should  be  made  when  they  are  due.  Anticipation  and 
postponement  are  alike  evil;  the  one  is  a  wrong  to  the 
people,  the  other,  to  the  public  creditors.  This  remark, 
however,  is  of  course  applicable  only  to  regular  payments, 
not  to  the  purchase  of  bonds  for  the  sinking  fund,  which 
may  be  made  at  the  fittest  time. 

The  practice  of  transferring  money  for  individuals  and 
firms  was  originally  adopted  by  the  government,  not  for 
the  purpose  of  providing  a  more  even  or  proportionate 
distribution  of  currency,  in  order  to  aid  the  market,  but 
simply  as  a  measure  for  forcing  silver  into  circulation. 
In  1880  the  government  offered  to  pay  silver  dollars  or 
certificates  free  of  charge  at  interior  points  where  there 
was  a  sub-treasury  or  United  States  depository,  in 
exchange  for  gold  paid  in  at  the  sub-treasury  in  New 
York.1  But  the  practice  was  evidently  available  as  a 
means  of  distributing  money  to  relieve  a  local  stringency. 
Advantage  would  be  taken  of  the  offer  of  the  government 
whenever  the  demand  for  money  in  the  places  to  which 
free  transfers  could  be  made  was  at  least  great  enough  to 
cause  exchange  on  these  places  to  be  at  a  premium  at  the 
points  whence  the  money  was  to  come. 

The  rationale  of  the  system  of  currency  transfers  is 
found  simply  in  the  use  by  the  government  of  its  power 
to  facilitate  exchange,  in  order  to  transfer  funds  rapidly 
and  at  nominal  cost  from  places  where  they  are  idle  or 

1  See  Taussig's  "  The  Silver  Situation  "  (Publications  of  American  Eco- 
nomic Association,  vol.  vii.  no.  1,  1892), 


172  THE  INDEPENDENT  TREASURY. 

little  needed  to  places  where  they  are  urgently  needed. 
The  system  was  developed  in  the  financial  distress  of 
the  winter  of  1890-91,  by  the  use  of  the  telegraph  to 
make  the  transfers  of  money.  In  addition  to  the  relief 
afforded  at  that  time  by  the  actual  transfer  by  telegraph 
of  some  three  millions  of  dollars  from  San  Francisco  to 
New  York,  the  situation  was  doubtless  considerably  eased 
by  the  knowledge  that  similar  action  would,  if  necessary, 
be  taken  at  other  points. 

The  method  of  government  transfer  has  merit,  especially 
for  moments  of  special  acuteness  of  strain  in  the  money 
market,  in  those  cases  where  a  stringency,  instead  of 
being  general  in  its  severity,  has  a  centre,  or  a  few  cen- 
tres, of  greatest  intensity,  as  was  doubtless  the  case  in 
the  winter  of  1890.  It  was  in  New  York  City  that  distress 
was  most  severe,  and  where  relief  was  consequently  most 
needed.  The  effect,  of  course,  is  simply  to  relieve  the 
strain  by  making  the  distribution  of  money  more  equable. 
But  the  very  strength  of  the  practice  is  also  its  source 
of  weakness.  Aside  from  the  fact  that  it  trenches  on 
the  legitimate  business  of  the  banks,  it  is  objectionable 
also  because  the  relief  afforded  at  one  place  is  afforded 
at  the  expense  of  other  places;  and  its  limit,  of  course, 
is  reached  in  the  transfer  of  such  funds  only  as  will  not 
cause  distress  at  the  points  whence  the  money  is  drawn. 
As  soon  as  the  legal  reserves  of  the  banks  there  are 
trenched  on,  or  even  threatened,  the  movement  has 
attained  the  limit  of  its  benefit.  The  San  Francisco 
banks  objected  to  the  telegraphic  transfers  of  1890-91  on 
this  very  ground,  that  they  depleted  their  reserves. 

Moreover,  on  general  principles,  the  system  cannot  be 
commended.  For  unless  the  amount  of  money  trans- 
ferred, free  of  charge,  to  the  community  suffering  from  a 


ITS  RELATION  TO   CRISES.  1 73 

stringency,  were  sufficient  to  supply  all  borrowers,  there 
would  be  danger  of  intensifying  the  distress.  The  free 
transfer  of  money  in  such  a  case  would  demoralize  ex- 
change on  the  place  where  the  stringency  existed,  and 
make  the  terms  harder  for  borrowers.  In  short,  the  prac- 
tice is  a  violation  of  the  oft-quoted  principle  of  good 
banking,  that  in  a  stringency,  or  crisis,  or  panic,  money 
enough  for  all  necessary  purposes  should  be  offered  for 
loan,  but  on  terms  so  hard  that  only  those  in  real  need 
will  seek  to  borrow.  Finally,  if  the  financial  strain  were 
due  to  the  locking  up  in  the  Sub-Treasury  of  money  needed 
to  restore  the  currency  to  its  normal  volume,1  complete  re- 
lief by  the  method  of  currency  transfer  would  be  impossi- 
ble, because  the  transfers  do  not  add  to  the  volume  of 
money  afloat;  and  the  furnishing  of  only  partial  relief, 
of  help  that  stops  short  of  the  complete  restoration 
of  confidence,  may  react  in  a  distress  more  acute  than 
before. 

The  other  mode  of  affording  relief  to  a  straitened 
market  is  by  the  purchase  of  bonds  with  money  which 
has  accumulated  in  the  Treasury.  Evidently  if  there  is 
no  surplus  no  relief  can  be  furnished  in  this  way.  It 
is  on  the  existence  of  the  policy  of  surplus  financiering, 
as  much  as  on  the  existence  of  the  Independent  Treasury, 
that  the  efficacy  of  this  mode  of  relief  must  depend.  If 
that  policy  were  abandoned,  aid  could  be  rendered  in  this 
way  only  from  temporary  surpluses  that  happened  to 
accumulate  in  hard  times,  and  the  scope  of  this  influence 
would  be  materially  diminished.  On  the  other  hand,  the 
policy  of  surplus  financiering,  if  there  were  no  Independ- 
ent Treasury,  would  not  by  itself  be  a  sufficient  condition 

1  That  is,  the  amount  needed  for  the  current  volume  of  commercial  transac- 
tions. 


174  THE  INDEPENDENT  TREASURY. 

for  relief  from  the  government;  for  the  existence  of  a 
surplus,  if  it  were  already  deposited  in  the  banks,  would 
not  make  it  possible  for  the  Treasury  to  help  the  money 
market.  It  is  the  existence  of  a  surplus  in  the  vaults  of 
the  Independent  Treasury  that  confers  on  the  government 
the  power  of  easing  a  panicky  market. 

As  already  said,  the  policy  of  giving  relief  in  a  strin- 
gency by  the  purchase  of  bonds  is  not  new.  In  1853 
there  was  considerable  fear  that  the  accumulation  of 
money  in  the  Treasury  would  distress  the  market,  and  the 
Secretary  of  the  Treasury  was  urged  to  expend  the  sur- 
plus which  had  accumulated.  There  was  no  panic,  or 
even  crisis,  but  only  "a  stringency,  or  pressure  for  money. 
Credit  was  not  disturbed.  The  stringency  was  intensified 
by  a  contraction  of  the  currency  due  to  the  disappearance 
of  silver  from  circulation.  Silver  went  out  of  use  on 
account  of  the  fall  in  the  value  of  gold  caused  by  its  dis- 
covery in  California.  This  result  was  aided  by  the  new 
coinage  law,  which  undervalued  gold.  To  counteract 
the  effect  of  this  contraction  the  Secretary  deposited 
gold  in  the  mint  with  which  to  purchase  the  silver.  His 
own  account  of  the  transaction  is  as  follows:  "The 
daily  payments  at  the  treasury,  in  discharge  of  the 
public  liabilities  and  the  redemption  of  said  loan,1  did 
not  equal  the  receipts.  A  large  surplus  accumulated 
in  the  treasury,  and  became  a  cause  of  alarm  in  com- 
mercial and  financial  circles.  It  was  hoped  that  the 
accumulation  in  the  treasury  would  exercise  a  beneficial 
restraint  upon  importations  and  speculative  credit  enter- 
prises, and  bring  the  business  of  the  country  into  a  safe 
and  wholesome  condition;  yet,  under  the  apprehension 
that  a  panic  might  arise  from  a  too  stringent  operation  of 

1  Of  1843. 


ITS  RELATION  TO   CRISES.  1 75 

the  treasury,  it  was  determined  to  make  advances  to  the 
mint  for  the  purchase  of  silver  for  the  new  coinage,  and  to 
enable  the  mint  to  pay  promptly  and  in  advance  of  coin- 
age for  gold  bullion."1  Some  five  million  dollars  were 
deposited  in  the  mint  to  enable  "the  mint  to  give  gold, 
which  circulated  as  money,  for  silver  that  was  out  of 
circulation,  because  of  the  premium  upon  it;  and  for 
gold  bullion  that  could  not  circulate  as  money  until 
coined."2 

The  relief  afforded  by  this  means  was  not  sufficient  to 
make  the  money  market  easy,  and  the  purchase  of  bonds 
was  resorted  to.  An  arrangement  was  made  with  brokers 
in  New  York  and  Philadelphia  to  purchase  bonds  at  the 
market  price  to  be  paid  for  on  presentation  at  the  Treas- 
ury. Even  this  means  failed  to  allay  apprehension, 
because  the  surplus  still  accumulated,  and  the  Secretary 
increased  his  offers.  In  a  circular  of  July  30,  1853,  he 
undertook  to  redeem  before  Dec.  1,  five  million  dollars  of 
the  loans  of  1847  and  1848,  at  a  premium  of  twenty-one 
per  cent,  and  interest  from  the  1st  of  July.  On  the  2 2d 
of  August  he  enlarged  his  bid  and  offered  to  purchase  two 
million  dollars  of  the  loans  due  in  1856  and  1862  at  a 
premium  of  eight  and  one-half  per  cent,  and  of  sixteen 
per  cent. ,  respectively.  "  The  result,"  wrote  the  Secretary, 
"has  been  satisfactory."  The  purchase  of  bonds  was 
continued  through  the  year. 

The  following  figures  show  the  specie  in  the  banks  and 
sub-treasury  at  New  York  in  the  fall  of  1853  to  the 
nearest  thousand:3  — 

1  Finance  Report,  1853. 

2  Finance  Report,  1853. 

3  The  figures  are  from  the  Bankers'  Magazine. 


176 


THE   INDEPENDENT  TREASURY. 


BANK 
LOANS. 

CIRCULA- 
TION. 

DEPOSITS. 

BANK 
SPECIE. 

SPECIE  IN 
SUB-TREAS. 

Aug.  6 

$97,900 

$9,5IO 

$60,995 

$9,747 

$8,046 

Sept.  3 

9L74I 

9.554 

57.503 

11,268 

9.079 

Oct.  1 

90,150 

9.552 

57.909 

11,232 

9,726 

Nov.  12 

82,882 

9,288 

56,201 

12,824 

6,147 

Dec.  10 

86,709 

9,076 

57338 

12,494 

Dec.  31 

90,162 

8,972 

58,964 

11,058 

3,800 

The  coin  in  all  the  sub-treasuries  and  depositories  at 
the  end  of  the  year  was  $23,951,945.  While,  in  spite  of 
the  efforts  of  the  Secretary,  the  specie  in  the  New  York 
sub-treasury  increased  through  August  and  September, 
yet  it  did  so  less  rapidly  than  before,  and  the  banks  were 
benefited. 

It  would  seem  from  the  figures  that  the  disbursements 
of  the  Sub-Treasury  helped  to  increase  the  specie  hold- 
ings of  the  banks  in  November  and  December,  and  enabled 
them  to  get  into  a  somewhat  stronger  position  towards  the 
end  of  the  year;  but,  coming  when  they  did,  they  had 
little  or  no  effect  in  curtailing  market  operations.  They 
seem  rather  to  have  given  speculation  a  somewhat  freer 
play. 

One  effect  of  the  purchase  of  bonds  by  the  government, 
which  we  shall  have  occasion  to  consider  later  on,  is  thus 
recorded  by  the  Bankers'1  Magazine : 1  "  Owing  partly  to 
the  notice  of  the  Treasury  Department  the  government 
six  per  cent,  loans  of  1867-68  have  advanced  from  120^ 
to  122,  and  the  five  per  cents  from  io8£  to  109." 

The  next  important  instance  of  government  relief  to 
the  market  was   in   1857.      "The  crisis  of  1857  was  an 

1  September,  1853. 


ITS  RELATION  TO   CRISES. 


177 


unusually  simple  case  of  activity,  speculation,  over- 
banking,  panic,  and  depression."1  The  symptoms  of 
the  coming  distress  were  seen  early  in  the  year,  and  to 
avert  disaster,  if  possible,  Secretary  Cobb  began  the  pur- 
chase of  bonds,  his  purpose  being,  in  his  own  words,  to 
afford  "relief  to  the  commercial  and  other  interests  of 
the  country,  which  were  then  struggling  to  ward  off  the 
revulsion  which  finally  came  upon  them." 

In  the  summer  months  of  1857  the  New  York  banks 
increased  their  loans  at  a  rapid  rate,  the  average  for  June, 
July,  and  August  being  over  eight  millions  larger  than 
the  average  for  the  same  months  in  1856.  The  banks 
followed  this  great  expansion  with  a  rapid  contraction  of 
loans,  the  decrease  from  Aug.  1  to  Dec.  5  amounting  to 
over  thirty-four  millions.  In  the  mean  time  their  specie 
more  than  doubled,  and  their  notes  in  circulation  decreased 
over  two  millions. 

The  following  table  shows  the  state  of  affairs  for  1857, 
to  the  nearest  thousand : 2 


Jan.  3 

Feb.  7 
Mar.  7 
Apr.  11 
May  2 
June  6 

Jul.v  3 
Aug.  1 
Sept.  5 
Oct.  3 
Nov.  7 
Dec.  5 


SPECIE  IN  N.Y. 
SUB-TREAS. 

$11,430 
I3,6l8 
15,189 

15.175 
14,408 
12,431 
10,317 
I2,l62 
11,678 

7.748 

5,408 

3.986 


SPECIE   IN 
N.Y.    BANKS. 


$11,172 
11,144 
11,707 
IO,884 
12,100 

12,837 

12,918 

10,228 

11,400 
16,492 
26,070 


LOANS    OF 
N.Y.  BANKS. 


CIRCULATION 
OF  N.Y.  BANKS. 


5109,149 
112,877 
1 1  1 ,900 

115.374 
114,409 

"5.338 
115,044 
120,597 
112,221 

105,935 
95,866 
96,526 


?8,6o2 
8,426 
8,465 
8,787 
9,006 
8,838 
8,901 
8,662 
8,673 
7,916 
6,434 
6,555 


1  Taussig  :  "  History  of  the  United  States  Tariff,"  p.  118. 

2  The  figures  are  from  the  Bankers'  Magazine,  April,  1857. 


178  THE  INDEPENDENT  TREASURY. 

Between  the  1st  of  August  and  the  first  week  in 
December  the  banks  gained  a  little  more  than  thirteen 
millions  of  specie,  while  the  Sub-Treasury  lost  about 
eight  millions,  half  of  which  was  paid  out  in  the  purchase 
of  bonds.  The  net  imports  of  gold  at  New  York  for  the 
same  time  were  $1,745,000,  which,  with  $8,812,000,  from 
California,  made  a  net  total  of  $10,557,000.  A  large 
part  of  the  increased  strength  of  the  banks  thus  appears 
to  have  come  from  the  proceeds  of  the  purchases  of  bonds 
by  the  government.  The  Secretary  of  the  Treasury  con- 
tinued buying  bonds  as  long  as  he  could,  and  took  the 
ground  that  it  might  be  wise  to  spend  the  whole  of  the 
surplus  in  that  way,  so  as  to  relieve  the  market,  even  if  as 
a  result  expenses  would  have  to  be  met  later  by  new  loans. 

The  influence  of  the  Independent  Treasury  in  this  crisis 
was  not  all  in  one  direction.  During  the  years  1855, 
1856,  and  1857  the  customs  receipts  were  unusually  large, 
and  the  accumulation  in  government  vaults  tended  to 
increase.  In  March,  1857,  the  government  held  in  the 
various  branches  of  the  Sub-Treasury  over  twenty-one 
millions  of  dollars.1  "At  New  York  the  public  funds  are 
accumulating  at  a  fearful  rate,  by  means  of  custom-house 
duties,  the  latter  being  for  the  current  fiscal  year,  thus 
far,  at  the  rate  of  nine  millions  beyond  the  extravagant 
y«ars  1855-56."  There  is  no  doubt  that  the  strain  in  the 
monetary  situation  was  increased  by  the  accumulations 
of  the  government  at  this  time.  And  in  so  far  as  these 
accumulations  restrained  the  discounts  which  the  banks 
made  for  purposes  of  speculation,  their  influence  must 
have  been  to  prevent  the  tide  of  speculation  from  rising 
as  high  as  it  otherwise  would  have  done,  or  to  bring  on 
the  inevitable  crash  sooner  than  it  would  have  come  of 

1  See  Bankers'  Magazine,  March,  1857. 


ITS  RELATION  TO   CRISES.  1 79 

itself.  Whatever  influence  of  this  nature  the  absorptions 
of  the  Sub-Treasury  may  have  had  at  this  time  was  partly 
counteracted,  however,  by  the  early  purchase  of  bonds. 
The  Secretary  began  to  offer  help  too  far  in  advance  of 
a  real  crisis,  and  thus  held  out  hope  to  speculators  that 
they  could  rely  on  further  aid.  The  accumulation  of 
funds  in  the  Sub-Treasury  at  a  'Tearful"  rate  was  a  good 
thing  so  long  as  the  business  which  caused  it  was  based 
on  over-speculation,  because  the  accumulation  was  con- 
stantly reducing  the  basis  of  that  speculation.  The 
accumulation  should  have  been  permitted  to  go  on  until 
the  speculation  lessened  and  the  crisis  was  at  hand.  Dis- 
counting too  far  in  advance  of  a  panic  will  not  be  likely 
to  prevent  it,  but  rather  to  make  it  more  certain  by  fur- 
nishing fuel,  so  to  speak,  on  which  speculation  can  feed 
further.  So  the  too  early  disbursements  from  the  Treasury 
may  intensify  rather  than  mitigate  financial  distress.  At 
least,  disbursements,  if  made  too  early,  will  fail  to  do  as 
much  good  as  they  would  if  made  later.  This  was  the 
case  with  Secretary  Cobb's  early  disbursements  in  1857. 

However,  although  the  purchases  of  bonds  then  did  not 
furnish  as  much  relief  as  they  would  have  done  if  they 
had  been  held  back  until  later,  yet  they  certainly  accom- 
plished much  good.  The  specie  paid  out  strengthened 
the  banks,  as  the  figures  show,  and  made  the  task  of 
resumption  easier,  and  sooner  possible;  and  if  the  banks 
had  not  weakened  themselves  so  much  it  is  possible 
that  the  government  disbursements,  especially  if  they  had 
been  delayed  a  little  longer,  would  have  saved  them  from 
suspension. 

One  wholly  good  result  of  the  existence  of  the  Inde- 
pendent Treasury  at  this  time  was  the  maintenance  of 
specie    payments   by  the  government.      Had  the  public 


180  THE  INDEPENDENT  TREASURY. 

money  been  deposited  in  the  banks,  or  had  the  receipt  of 
bank-notes  for  public  dues  been  lawful,  the  Treasury 
would  have  been  as  seriously  embarrassed  as  at  the  begin- 
ning of  the  panic  of  1837.  Comparing  the  situation  in 
1857  with  that  in  1837,  the  Secretary  of  the  Treasury 
wrote : a  "The  most  remarkable  feature  distinguishing  the 
two  periods  has  reference  to  the  effect  upon  the  commer- 
cial and  general  business  interest  of  the  country  produced 
by  the  present  operations  of  the  Independent  Treasury.  It 
is  the  relief  which  has  been  afforded  to  the  money  market 
by  the  disbursements  in  specie  of  the  General  Govern- 
ment. In  1837  tne  demand  of  the  Government  for  its 
funds  with  which  to  meet  its  obligations  weakened  the 
banks,  or  crippled  their  resources,  and  added  to  the  gen- 
eral panic  and  pressure.  In  1857  the  disbursements  by 
the  Government  of  its  funds  which  it  kept  in  its  own 
vaults,  supplied  the  banks  with  specie,  strengthened  their 
hands,  and  would  thus  have  enabled  them  to  afford  relief 
when  it  was  so  much  needed,  if  they  had  been  in  a  con- 
dition to  do  it." 

It  is  worth  noticing  incidentally  that  the  appearance 
of  the  government  on  the  market  to  buy  bonds  forced 
their  prices  up  once  more.  Said  the  Bankers'1  Magazine 
of  April,  1857:  "In  government  bonds  the  rates  are 
nominal,  few  being  offered  in  the  market,  as  the  Secretary 
of  the  Treasury  is  preparing  to  pay  a  premium  of  16  per 
cent,  on  the  bonds  due  in  1867-68,  with  the  accrued 
interest  of  three  months,  equivalent  in  all  to  117^  per 
cent." 

In  the  panic  of  1873  we  have  to  deal  with  conditions 
different  from  those  which  prevailed  in  1837  or  in  1857. 
The  bank  paper  was  as  really    inconvertible    in    1873, 

l  Finance  Report,  1857. 


ITS  RELATION   TO   CRISES.  l8l 

indeed,  as  it  was  in  the  other  years  mentioned,  although 
it  could  be  exchanged  for  government  notes  or  green- 
backs. For  the  government  itself  was  on  a  "  depreciated 
paper  basis."  It  could  not,  therefore,  promote  resump- 
tion by  its  disbursements  of  specie  and  treasury  notes,  as 
it  did  in  1837  and  1857.  At  the  height  of  the  panic  there 
lay  in  the  vaults  of  the  Treasury  "  $50, 000, 000  of  gold 
coin,  which  could  lawfully  have  been  paid  out  in  exchange 
for  government  obligations  without  embarrassing  the 
operations  of  the  government;  but  as  specie  could  not 
be  employed  to  pay  private  debts  without  a  sacrifice  at 
once  of  about  twelve  per  cent.  —  the  amount  of  its  pre- 
mium in  paper  —  it  was  not  wanted."  l 

The  government  was,  however,  able  to  lend  from  ifs 
stored-up  surplus  of  the  legal-tender  currency  in  use  at 
the  time. 

The  panic  of  1873,  like  that  of  1857,  was  world-wide. 
In  this  country  it  was  largely  the  result  of  the  too  rapid 
transmutation  of  circulating  capital  into  fixed  capital  dur- 
ing the  few  years  preceding.  These  years  were  an  era  of 
extensive  railroad  building,  and  the  immediate  cause  of 
the  crash  in  the  money  market  was  due  to  the  fact  that 
some  of  the  largest  of  these  enterprises  did  not  realize 
profits  quickly  enough  to  pay  the  loans  which  had  been 
advanced  on  them.  Credit  was  shaken,  in  consequence, 
and  panic  resulted.  The  panic  was  not  due,  properly 
speaking,  to  a  lack  of  money,  but  to  a  lack,  or  destruc- 
tion, of  credit. 

The  forerunner  of  the  coming  disaster  was  the  severe 
money  stringency  which  was  felt  in  the  fall  of  1872,  with 
the  occurrence  of  which  the  unwise  management  of  the 
Treasury  doubtless  had  something  to  do.    The  monthly 

1  Upton's  "  Money  in  Politics,"  p.  139. 


1 82  THE  INDEPENDENT  TREASURY. 

currency  balance  of  the  Treasury  averaged  fourteen  and 
one-half  millions  in  187 1,  and  twelve  and  a  half  in  187 j. 
The  Secretary  lessened  the  money  afloat  by  selling  gold 
to  a  greater  extent  than  he  bought  bonds;  as  the  gold 
could  not  circulate  the  net  result  was  a  loss  of  currency  to 
business.  This  course  of  action  was  the  reverse  of  that 
followed  by  Secretary  Cobb  in  1857.1  He  bought  silver, 
which  did  not  circulate,  with  gold,  which  did  circulate; 
Secretary  Boutwell,  on  the  other  hand,  sold  non-current 
gold  for  current  greenbacks.  So  far  as  this  process  did 
not  occur  in  the  autumn,  the  time  at  which  the  legitimate 
demand  for  money  is  most  active,  it  was  not  very  objec- 
tionable under  the  circumstances  which  prevailed  at  that 
time.  For  the  years  187 1,  1872,  and  1873  were  years  of 
too  great  speculation,  and  the  absorptions  of  the  Treasury 
restricted  the  ability  of  the  banks  to  loan,  and  so  must 
have  retarded  speculation. 

It  seems  reasonable  to  think  that  such  was,  in  general, 
the  effect  of  the  operations  of  the  Independent  Treasury 
in  those  years.2  But  the  management  of  the  Treasury 
was  not  dictated  by  a  conscious  adherence  to  a  policy  of 
restriction  of  speculation.  Consequently  what  little  in- 
fluence for  good  the  Independent  Treasury  may  have  had 
in  this  way,  in  the  three  years  under  consideration,  must 
be  regarded  as,  in  the  main,  accidental. 

The  current  of  speculation  was  too  strong,  however,  to 
be  stopped  by  any  restrictive  action  of  the  Sub-Treasury. 
The  stringency  became  severe  in  the  fall  of  1872,  and  the 
Secretary  was  again  called  on  to  relieve  the  pressure.  In 
the  first  week  of  October  he  sold  five  million  dollars  of 
gold,  and  deposited  the  proceeds  in  designated  banks; 

1  See  p.  175. 

2  Cf,  the  New  York  Independent,  Jan.  9,  1873.     Monetary  article, 


ITS  RELATION  TO    CRISES. 


i83 


then,  without  previous  notice,  he  bought  five  million 
dollars  worth  of  five-twenty  bonds,  so  that  ten  million  dol- 
lars of  currency  were,  by  the  two  transactions,  made 
available  for  business.  The  bank  reserves  immediately 
rose,  and  the  banks  enlarged  their  discounts.  Following 
are  the  figures  :  for  the  New  York  banks :  — 


Oct.  s- 


Oct.    12. 


Loans  and  discounts 
Specie  in  banks 
Legal  tenders 


$269,810,300        $268,298,300 
9,943,900  12,217,800 

41,915,700  45,759,400 


Oct.  19. 


Oct.  26. 


$270,557>6o°  '  $274,925,000 
12,625,500  I  10,795,300 
52,586,400  52,342,100 


Under  the  influence  of  these  changes  in  the  condition 
of  the  banks,  call-loans,  which  on  the  4th  of  October  had 
ranged  from  six  per  cent,  in  currency  to  seven  per  cent,  in 
gold,  with  commissions  additional  in  some  cases,  fell  to 
a  range  of  from  three  or  four  to  seven  per  cent.,  in  cur- 
rency, and  the  market  for  such  loans  became  "easy," 
with  an  average  rate  of  from  five  to  six  per  cent. 

It  is  to  be  noted,  however,  as  an  important  fact,  that 
there  was  a  great  difference  between  the  extent  of  the 
relief  that  came  to  stock-brokers  and  to  commercial  bor- 
rowers. The  easy  rates  accommodated  the  brokers,  but 
the  best  indorsed  sixty-day  commercial  paper  could  hardly 
be  discounted  for  less  than  ten  per  cent.  "  It  thus  ap- 
pears," said  the  Financial  Chronicle*  "that  the  Treasury 
operations  have  thus  far  chiefly  benefited  the  borrowers 
of  Wall  and  Broad  Streets  more  than  the  commercial 
community."  This  fact  would  seem  to  show  that  credit 
was  already  shaken,  and  that,  therefore,  those  who  had 
money  feared  to  put  it  where  they  could  not  instantly  call 
it  back  at  need.     It  would  seem  from  this  experience  that 

1  From  the  New  York  Commercial  and  Financial  Chronicle,  Oct.  19, 
1872,  p.  519. 

1  Oct.  19,  1872,  p.  517. 


1 84  THE  INDEPENDENT  TREASURY. 

when  a  stringency  or  a  panic  is  brought  on  primarily  by 
a  weakening  of  credit,  and  not  primarily  by  a  lack  of 
money,  that  is,  when  the  stringency  is  the  result,  and  not 
the  cause,  of  unsteadiness  of  credit,  the  disbursements 
of  the  government  for  purposes  of  relief  afford  more  help 
to  those  engaged  in  speculation  than  to  commercial  enter- 
prises properly  so  called.  This  fact  limits  very  materially 
the  justification  of  government  disbursements  for  relieving 
the  market  under  such  circumstances. 

Although,  as  we  have  seen,  the  Secretary  of  the  Treas- 
ury had  shaped  his  policy  in  aid  of  the  money  market 
early  in  October,  he  did  not  continue  to  do  so  for  long. 
The  bulk  of  the  money  deposited  in  some  of  the  banks  in 
October  was  withdrawn  later  on.  During  December,  a 
month  when  money  is  in  demand,  the  banks  lost  to  the 
Sub-Treasury  about  three  million  five  hundred  thou- 
sand dollars  despite  the  remonstrances  of  the  mercantile 
community.1  The  result  was  that  loans  on  government 
securities  ran  up  to  seven  per  cent,  in  gold,  while  bor- 
rowers on  stock  collateral  were  obliged  to  pay  from  one- 
sixteenth  to  one-quarter  per  cent,  per  day  for  their  loans.2 

It  is  clear  that  in  1872  the  action  of  the  Independent 
Treasury,  as  managed  by  Secretary  Boutwell,  favored 
speculation  rather  than  legitimate  business,  by  the  ill- 
timed  contractions  and  expansions  which  the  Secretary 
caused,  so  that  its  influence  must,  on  the  whole,  be  set 
down  as  evil.  The  same  thing  is  true,  on  the  whole,  of 
the  year  1873;  for  the  same  injudicious  course  was  fol- 
lowed. No  definite,  consistent,  and  continuous  policy 
was  adopted  for  guiding  the  relations  of  the  Treasury 
to  the  business  community. 

1  See  the  Bankers'  Magazine,  January,  1873,  and  the  New  York  Indepen- 
dent, Jan.  2,  1873. 

2  Ibid. 


ITS  RELATION   TO   CRISES.  1 85 

The  stringency  of  1872  became  the  panic  of  1873.  The 
money  market  was  in  an  unsettled  condition  most  of  the 
time  through  the  first  nine  months  of  the  year.  The  legal- 
tender  averages  of  the  banks  were  lower  than  in  1872. 
There  was  a  stringency  in  April,  discount  rates  ran  up, 
and  a  slight  panicky  feeling  prevailed,  especially  on  the 
occurrence  of  the  panics  in  Vienna  and  Berlin.  Between 
May  and  August  the  banks,  responding  to  the  speculative 
demand  for  money,  heedlessly  expanded  their  loans  some 
twenty  millions.  On  the  17th  of  September  the  New 
York  Warehouse  and  Security  Company  failed,  and  the 
business  community  was  thrown  into  a  state  of  feverish 
anxiety  by  the  failure.  Secretary  Richardson  took  no 
steps  to  ease  the  situation.  On  the  18th  the  crash  of 
credit  came  with  the  suspension  of  Jay  Cooke  and  Com- 
pany. Still  the  government  took  no  action,  though  fail- 
ure followed  failure,  until  the  19th.  Then  it  was 
determined  to  buy  ten  million  dollars  of  five-twenty 
bonds  at  par  in  gold,  on  Saturday,  the  20th,  over  the 
counter  of  the  New  York  sub-treasury.  Owing  to  defec- 
tive clerical  facilities  only  a  little  more  than  two  and  a 
half  millions  were  purchased.  Orders  were  then  issued 
by  Secretary  Richardson  to  purchase  five-twenty  bonds  as 
fast  as  offered  in  private  sale,  at  the  New  York  sub- 
treasury,  at  a  price  not  higher  than  par  in  gold.  On 
Monday,  the  22d,  over  three  million  dollars  were  accord- 
ingly paid  out  in  legal  tenders  for  bonds,  and  over  five 
and  a  half  millions  for  legal-tender  certificates.  Next 
day  three  million  dollars  more  were  put  out  for  bonds, 
and  over  a  million  for  certificates.  On  Thursday,  the 
25th  of  September,  the  Treasury  stopped  buying,  having 
paid  out  over  twenty-four  million  dollars  of  currency  for 
bonds  and  certificates.     During  the  week,  the  Secretary 


1 86 


THE  INDEPENDENT  TREASURY. 


had  bought  twelve  million  dollars  of  bonds  from  the  sav- 
ings banks,  and  on  the  29th  he  prepaid  the  November 
interest. 

These  measures  were  practically  all  the  help  which  the 
Treasury  rendered  at  this  time;  and  while  they  were 
doubtless  of  some  avail,  they  were  utterly  futile  as  a  stay 
to  the  panic.  None  of  the  money  disbursed  went  into  the 
banks.  They  lost,  during  the  week  when  the  Treasury 
was  buying  bonds,  eleven  millions  of  greenbacks;  their 
reserve  ran  down  from  thirty-eight  millions  on  the  6th  of 
September,  to  twelve  millions  on  the  27th,  and  their 
deposits  decreased  some  fifty  millions.1 

The  figures  are :  — 


Aug.  30. 
Sept.    6. 

"      13- 
"     20. 


$288,883,000 
28S, 374,200 
284,536,200 
278,421,700 


523,095,200 
20,767,000 
20,442,300 
18,844,600 


LEGAL 
TENDERS. 


$44,729,300  ;$220,390,300 

38,679,900  I  212,772,700 

36,717,200  I  207,317,500 

34,307,900  I  198,040,100 


The  figures  of  the  condition  of  the  banks,  for  the  ten 
weeks  after  Sept.  20  are  not  available  because  reports 
were  not  published  during  that  time. 

The  success  met  by  the  government  in  its  efforts  to 
allay  the  panic  is  thus  shown  to  have  been  very  small. 
The  Secretary  of  the  Treasury  himself  evidently  felt 
this,  if  we  may  judge  from  the  modest  account  of  his 
efforts  given  in  his  report.  He  tells  us  there  that  bonds 
were  purchased  for  the  sinking  fund  to  the  amount  of 
about  thirteen  million  dollars  worth,  "when  it  became 
evident  that  the  amount  offering  for  purchase  was  increas- 
ing to  an  extent  beyond  the  power  of  the  Treasury  to 
accept,    and  the  purchasing  was  closed.   .   .   .   The  cur- 

1  See  article  in  Lifpincott's  Magazine,  December,  1873. 


ITS  RELATION   TO   CRISES.  1 87 

rency  paid  out  of  the  Treasury  for  bonds  did  much  to 
strengthen  many  savings  banks,  and  to  prevent  a  panic 
among  their  numerous  depositors,  who  began  to  be 
alarmed ;  and  had  there  developed  an  extended  run  upon 
those  useful  institutions,  it  would  inevitably  have  caused 
widespread  disaster  and  distress.  It  also  fortified  other 
banks,  and  checked  the  general  alarm  to  some  extent." 

The  futility  of  the  efforts  of  the  government  to  relieve 
the  distress  was  shown  in  the  rates  of  discount  also.  The 
rate  on  call  loans  went  up  from  seven  per  cent,  in  gold, 
on  the  1 8th  of  the  month,  to  one  and  one  half  per  cent,  a 
day  on  the  20th,  the  day  of  the  first  government  purchase 
of  bonds ;  and  two  or  three  days  later  there  was  no  quo- 
table rate.  These  facts  show  that  the  provisions  of  the 
Treasury  to  mitigate  the  pressure  did  not  inspire  confi- 
dence, and  so  could  not  check  the  panic.  For  they  prove 
that  the  money  disbursed  by  the  government  was  hoarded. 
Part  of  it  went  into  the  savings  banks.  "  The  savings 
institutions  of  New  York  and  Brooklyn  hold  about  thirteen 
millions  of  greenbacks,"  said  the  Financial  Chronicle.1 
"  Part  of  these  notes  have  been  drawn  from  our  city  banks, 
but  a  large  amount  were  obtained  from  the  Treasury  last 
week  in  payment  for  United  States  bonds.  These  green- 
backs are  now  lying  idle  in  the  vaults  of  the  savings 
banks ;  and  the  question  is,  what  ought  to  be  done  with 
them." 

It  is  not  to  be  denied  that  the  aid  rendered  the  savings 
banks  was  good  and  commendable.  But  this  did  not 
help  the  general  situation.  There  was  a  time  during  the 
panic  when  it  was,  perhaps,  advisable  for  the  savings 
banks  to  increase  their  stock  of  greenbacks ;  but  it  was 
not  absolutely  necessary,  because  they  could  have  pro- 

1  Oct.  4, 1873,  p.  447. 


1 88  THE  INDEPENDENT  TREASURY. 

tected  themselves  from  a  sudden  run  by  taking  advantage 
of  the  clause  in  their  charters  permitting  them  to  requi.^ 
thirty  days'  notice  of  withdrawals.  Moreover,  the  savings 
banks  kept  their  greenbacks  in  their  vaults  after  the 
danger  to  themselves  had  passed,  and  so  prevented  the 
use  of  them  by  the  mercantile  community.  By  this  action 
the  efforts  of  the  government  were  so  far  nullified. 

As  for  the  reasons  for  the  complete  failure  of  the 
Secretary  of  the  Treasury  to  accomplish  his  purpose  of 
checking  the  panic,  we  must  note,  in  the  first  place,  that 
his  steps  were  not  taken  early  enough.  The  government 
did  not  move  in  the  matter  until  the  crash  of  credit 
occurred,  and  the  market  had  passed  from  the  stage  of 
crisis  to  that  of  panic.  The  proper  time  for  the  purchase 
of  bonds  was  before  that  point;  the  latest  time  at  which 
it  should  have  begun  would  have  been  in  time  to  save 
Jay  Cooke  and  Company,  if  that  had  been  possible. 
That  is,  it  seems  that  if  the  Secretary  had  sold  his  bonds 
on  Wednesday  instead  of  Saturday,  much  greater  good 
might  have  been  done;  for  if  there  was  any  time  at 
which  confidence  could  have  been  restored  by  "easier 
money,"  it  was  then.  After  the  failure  of  Cooke  and 
Company  the  current  of  suspicion  and  distrust  was  alto- 
gether too  strong  to  be  stopped  by  the  limited  aid  which 
the  government  could  give.  Even  after  the  government 
disbursements  of  the  20th  were  supplemented,  on  the 
22d,  by  the  use  of  ten  million  dollars  of  clearing-house 
certificates,  the  feeling  of  panic  did  not  disappear,  and  it 
was  thought  necessary,  two  days  later,  to  permit  the  use 
of  ten  million  more  certificates. 

The  measures  of  the  Secretary  of  the  Treasury  were 
also  insufficient  for  the  situation  at  the  time  they  were 
taken.     Indeed,  this  was  felt  when   the    Secretary  first 


ITS  RELATION  TO   CRISES.  1 89 

announced  his  intention  of  buying  bonds.  There  was 
general  disappointment  at  the  narrow  scope  of  his  meas- 
ures. It  was  felt  that  more  liberal  disbursements  should 
have  been  provided  for,  and  that  the  government  should 
have  stood  ready  to  redeem  not  only  the  five-twenty  bonds, 
but  any  issue  of  its  stock.  It  was  announced  later,  to  be 
sure,  that  the  Treasury  would  buy  bonds  indefinitely;  but 
that  could  be  only  nominally  true,  because,  as  the  event 
showed,  the  amount  of  money  at  the  disposal  of  the  Sec- 
retary was  very  limited. 

It  may,  indeed,  be  questioned  whether  the  action  of 
the  government  at  this  time  did  not  do  more  harm  than 
good.  The  money  which  it  spent  went,  as  has  been 
shown,  into  private  hoards  and  into  the  savings  banks, 
and  so  furnished  no  relief  to  the  market  in  general.  It 
was  just  as  much  out  of  the  reach  of  the  business  com- 
munity as  it  had  been  when  it  lay  in  the  vaults  of  the 
Treasury.  But  the  public  relied  on  the  government; 
they  expected  that  its  action  would  be  a  great  help,  and 
the  general  tone  of  affairs  immediately  after  the  failure 
of  the  measures  of  the  government  seems  to  show  that 
the  reaction  of  disappointment  induced  more  distrust  and 
added  to  the  panic.  Both  in  1857  and  1873,  then,  the 
ability  of  the  government  to  allay  the  panic  was  counter- 
acted by  the  fact  that  the  public  knew  just  about  how 
far  the  Secretary  could  go.  He  could  offer  only  a  limited 
relief,  which  had  little  moral  effect. 

The  insufficiency  of  the  Treasury  provisions  became 
evident  on  Saturday,  the  20th,  and  the  use  of  clearing- 
house certificates  became  necessary  on  the  next  Monday. 
It  is  at  least  questionable  whether  a  resort  to  these  would 
have  been  necessary  so  early  had  the  events  of  the  20th 
not  demonstrated  the  complete  inability  of  the  govern- 
ment to  cope  with  the  situation. 


I90  THE  INDEPENDENT  TREASURY. 

We  have  seen  that  money  put  out  for  bonds  was  hoarded 
either  by  the  savings  banks  or  by  individuals.  This  fact 
implies  that  they  did  not  get  into  the  hands  of  those 
whose  need  for  help  was  pressing.  The  reason  for  this 
lay  in  the  fact  that  the  government  terms  were  not  hard 
enough.  The  bonds  were  paid  for  in  legal  tenders,  while 
they  were  redeemed  at  their  par  value  in  gold.  The 
difference  between  the  premium  on  the  bonds  and  the 
premium  on  gold  was  less  than  two  per  cent.,  a  loss 
altogether  too  small  to  prevent  those  who  could  have 
got  on  without  the  money  from  selling  their  bonds 
and  hoarding  the  proceeds.  This  is  the  true  meaning  of 
the  Secretary's  remark  that  his  disbursements  aided  many 
savings  banks. 

Finally,  it  is  worthy  of  note  that,  in  spite  of  all  efforts, 
the  panic  of  1873  ran  its  course.  It  cannot  properly  be 
said  to  have  been  checked.  The  reason  is  obvious :  what 
was  needed  was  a  re-establishment  of  confidence  in  the 
enterprises  which  had  been  the  primary  source  of  distrust; 
but  no  amount  of  money  disbursed  by  the  government 
could  produce  this  result.  When  the  bridge  across  which 
a  man  is  walking  with  confidence  breaks  and  precipitates 
him  into  a  torrent  below  and  so  throws  his  mind  into  a 
state  of  panic,  it  is  with  great  hesitation  that  he  ventures 
to  cross  again,  on  a  temporary  plank,  however  sound  it 
may  seem.  There  seems  reason  to  think  that  the  panic 
of  1873  was  of  such  a  nature  that  government  disburse- 
ments were  not  a  remedy,  but  at  best  only  a  slight 
palliative.  This  aspect  of  the  case  will  be  discussed 
later  on. 

The  next  important  crisis  was  that  of  the  autumn  of 
1890.  Various  causes  had  been  at  work  promoting  spec- 
ulation for  some  time  before.      In  this  country  the  pro- 


ITS  tiELAT/ON   TO    CRISES.  I9I 

spective  action  of  the  McKinley  tariff  had  brought  about 
a  large  increase  of  imports  for  speculative  holding,  and 
the  payment  of  duties,  immediate  and  prospective,  threat- 
ened to  lock  up  so  great  an  amount  of  money  as  to  cause 
a  stringency.  Moreover,  there  was  much  speculation 
based  on  the  idea  of  inflation,  which  it  was  supposed  would 
soon  be  produced  by  legislation  concerning  silver.  These 
sanguine  hopes  were  doomed  to  disappointment,  how- 
ever. "The  Silver  Bill  was  passed,  and  the  Treasury  let 
out  enormous  amounts  of  cash.  But  the  effects  were  not 
as  expected.  The  supplies  of  currency  had  only  a  tempo- 
rary effect  in  easing  money.  Silver  certificates  1  rose  to 
121  in  August,  but  are  now  down  to  103,  notwithstanding 
the  heavy  government  purchases  in  the  interval.  Stock 
exchange  values,  with  great  pertinacity,  declined  instead 
of  advancing,  till  finally  this  week  the  crisis  came.  Thus 
once  again  has  it  been  demonstrated  that  legislative  edicts 
cannot  arrest  the  tendency  of  natural  laws,  and  that  some- 
thing more  than  a  flood  of  currency  is  needed  to  secure 
permanent  ease  in  the  money  market."  2  In  this  dubious 
state  of  the  public  mind  the  failure  of  the  Barings  in 
England  occurred  and  for  a  time  threatened  to  cause  a 
panic.  The  excitement  calmed  down,  however,  under 
the  prompt  and  efficient  management  of  the  failure  by  the 
Bank  of  England.  But  while  a  panic  was  averted  the 
market  continued  very  restricted,  and  business  suffered 
from  the  evils  of  a  crisis.  So  great  was  the  stringency 
that  "  the  banking  and  currency  machinery  of  the  country 
was  strained  to  its  utmost  and  worked  very  unsatisfac- 
torily." The  lack  of  elasticity  in  our  currency  system 
prevented  the  banks  from  affording  the  relief  that  could 
reasonably  have  been  expected  from  them  under  a  better 

1  For  bar  silver  on  deposit. 

2  New  York  Commercial  and  Financial  Chronicle,  Nov.  15,  1S90. 


192 


THE  INDEPENDENT   TREASURY. 


system,  so  that,  notwithstanding  the  unusually  large  dis- 
bursements of  the  government,  they  were  compelled  to 
resort  to  the  use  of  clearing-house  certificates  in  the 
settlement  of  their  balances.  The  aid  of  the  Secretary 
of  the  Treasury  was,  as  usual,  invoked,  and  he  responded 
with  the  purchase  of  bonds.  In  fact,  Secretary  Windom 
had  been  buying  bonds,  so  as  to  prevent  a  stringency  in 
the  fall,  as  early  as  July.  Under  circulars  issued  in  that 
month  the  aggregate  purchases  of  four  per  cent,  and  four 
and  one-half  per  cent,  bonds  amounted  to  $10,358,950. 
As  this  disbursement  was  "  inadequate  to  meet  existing 
conditions,"  a  circular  of  Aug.  19  announced  that  four 
and  one-half  per  cent,  bonds  would  be  redeemed,  with 
interest,  through  May,  189 1.  On  Aug.  21,  twenty  mil- 
lions of  these  bonds  were  called  for,  on  condition  of  the 
prepayment,  after  Sept.  1,  1890,  of  all  interest  on  them 
to  September,  1891.  Twenty  millions  more  were  called 
for  on  Aug.  30;  and  on  Sept.  6  the  prepayment  of  inter- 
est to  the  following  July  was  offered  to  holders  of  four 
per  cents  and  (afterwards)  of  "  currency  sixes ;  "  and, 
finally,  on  the  13th  of  September,  some  seventeen  mil- 
lions more  of  four  per  cents  were  redeemed.  The  trans- 
actions are  tabulated  thus : '  — 


BONDS    REDEEMED. 

DISBURSEMENTS. 

Under  circular  of  Julv 
«           .«         «    Aug 

41                    Ii                 «            (I 
U                    «                 II            II 

"           "         "  Sept. 
(i           <i         i>      ii 

19, 

!9. 

21, 
13. 

1890. 

11 
ii 

$17,324,850 

560,050 

20,060,700 

l8,678,IOO 

(Int.  prepaid) 
17,071,150 

$21,225,989.46 
58l,I38.I2 
20,964,868.42 
19,518,176.83 
12,009,951.50 
21,617,67377 

$73,694,850 

i?9S»9I7.798-io 

In  addition  to  the  heavy  payments  for  bonds  the  Treas- 
ury made  large  disbursements  for  other  purposes   also, 

1  See  Report  of  the  Secretary  of  the  Treasury  for  1890. 


ITS  RELATION  TO   CRISES.  1 93 

during  the  month  of  September,  and  its  net  available 
balance  was  reduced,  by  the  end  of  October,  to  a  little 
over  two  million  dollars,  not  including  fractional  currency 
and  the  national  bank  redemption  fund.  The  tremendous 
amount  of  money  reported  as  disbursed  in  the  purchase 
of  bonds  was  further  increased  by  the  ordinary  quarterly 
payments  in  September,  and  especially  by  the  very  large 
disbursements  for  pensions. 

It  must  be  borne  in  mind,  however,  that  not  all  the 
money  reported  as  disbursed  went  into  the  channels  of 
business  immediately.1  The  net  gain  of  currency  to  com- 
merce, calculated  from  the  monthly  reports  of  the  Treas- 
ury holdings  of  money,  was,  for  August,  $7,479,615,  and 
for  September,  $57,887,849,  allowing  for  the  gain  from 
silver  bullion  certificates,  and  for  the  decrease  in  national 
bank  circulation.2     The  output  of  the  Treasury  in  August 

1  See  pp.  89,  160. 

2  The  figures  for  September,  according  to  the  Chronicle,  were  as  follows  :  — 
Net  holdings  of  the  United  States  Treasury.      Sept.  1.  Oct.  1. 

Gold  coin  and  bullion 3185,837,581  £147,0,81,732 

Silver  coin  and  bullion 15i749>535  6,590,212 

Treasury  notes,  Act  1S90 2,233,100  962,500 

Legal-tender  notes 10,573,710  5)775>290 

National  bank  notes 5,063,227  4,620,511 

Fractional  silver 22,077,629  20,768,255 

Total  cash  in  Sub-Treasury $241, 534,782  #186,698, 500 

Loss  by  Sub-Treasury  and  gain  to  commerce £54,836,282 

Silver  bullion   certificates  issued  during  the 

month £4,460,000 

National  bank  notes  retired 1,408,433 

3.05'. 567 

Total  net  gain  to  commerce  for  the  month £57,887,849 

During  the  month  over  £10,000,000  were  actually  disbursed  for  pensions 
at  New  York;  £24,664,350  of  4A  per  cent,  bonds,  and  £17,625,600  of  4  per 
cents,  were  actually  redeemed ;  £4,524,190  were  paid  out  in  premiums  on 
bonds  purchased,  and  £13,410,001  in  interest  payments;  making  a  total  of 
seventy  millions  of  dollars. 


194 


THE  INDEPENDENT  TREASURY. 


and  September  was  reflected  in  an  enlargement  of  the 
New  York  bank  reserves,  as  shown  in  the  following  table,1 
in  the  face,  too,  of  a  drain  of  money  to  the  interior:  — 


LOANS. 

SPECIE. 

LEGAL  TENDERS. 

DEPOSITS. 

Aug.     g. 

#406,139,500 

#73,496,000 

#29,766,300 

#407,905,200 

"      16. 

402,163,900 

70,843,200 

28,378,100 

399,508,100 

'      *3- 

397,672,300 

68,621,100 

26,254,200 

389,553.«00 

'      3°- 

392,546,400 

69,595,600 

26,155,100 

385,149,500 

Sept.    6. 

394,978,100 

70,216,700 

25,482,000 

388,399,300 

'3- 

393,160,100 

67,842,300 

24,663,500 

388,250,900 

'         20. 

392,631,600 

76,417,200 

22,983,700 

389,982,800 

'        *7- 

394,029,100 

93,397.300 

22,387,800 

406,838,800 

The  rates  on  call   loans  ranged  through   August  and 
September  as  follows: 2- 


AUG.    4. 

AUG.    II. 

AUG.    18. 

AUG.   25. 

8-4 

25-8 

16-6 

12  —  2 

SEPT.   6. 

SEPT.    13. 

sbpt.  20. 

SEPT.  27. 

3-12 

3-6+i  per 
cent,  a  day 
commission. 

2 — 6+£  com- 
mission. 

2-6 

The  rate  of  discount  on  call  loans  fell  after  the  Treas- 
ury disbursements,  as  seen  from  the  table.  The  net 
result  of  the  operations  of  the  Treasury  was  a  decided 
relief  of  the  money  market  in  September.  There  was,  as 
yet,  no  serious  disturbance  of  credit ;  the  difficulty  was 
to  get  enough  money  to  meet  the  suddenly  increased 
demand,  and  the  government  disbursements  relieved  the 
pressure. 

But  the  help  afforded  had  only  a  temporary  effect. 
The  stringency  recurred  in  November;  and  its  occurrence, 
this  time,  was  marked  by  a  failure  of  confidence  and  the 

1  The  figures  are  from  the  New  York  Financial  Chronicle. 

2  The  Bankers'  Magazine. 


ITS  RELATION   TO    CRISES. 


195 


appearance  of  distrust  due  to  the  announcement  of  some 
important  failures.  The  reserve  of  the  New  York  banks 
began  to  run  down  about  the  middle  of  October,  and 
continued  to  do  so  until  the  second  week  of  December. 
The  figures  for  November  are :  — 


LOANS. 

SPECIE. 

LEGAL   TENDERS. 

DEPOSITS. 

Nov.    1. 
"       8. 

"     "5- 

"     22. 

"        29- 

$399.791.9°0 
398.855.7OO 
393,277,900 
387,297,200 
384,548,100 

$77,671, 70O 
74,486,600 
73.995.400 
73,191,200 

71,658,500 

$22,101,400 
21,032,500 
2I,8l6,000 
22,319,800 
23,368,400 

$396,284,500 
392.253.400 

386,574,800 
381,685,000 
378,578,200 

The  state  of  the  money  market  for  the  same  month  is 
shown  by  the  rates  of  discount:  ' — 


DISCOUNT   ON 

NOV.    3. 

NOV.    IO. 

NOV.    17. 

NOV.    24. 

Commercial  paper    .     . 

7-8 
6-4 

7-8 
186-15 

7-8 
186-6 

8-9 
5-3 

These  figures  show  that  the  panic  was  in  the  stock 
market,  and  not  in  business  enterprises  proper. 

So  great  was  the  stringency  brought  on  by  failure  of 
confidence  that  the  banks  of  New  York,  Philadelphia, 
and  Boston  issued  clearing-house  certificates,  and  there 
was  a  renewal  of  the  call  on  the  government  for  assistance. 
But  the  available  surplus  of  the  Treasury  had  been  so 
heavily  drawn  on  by  previous  disbursements  that  Secre- 
tary Windom  was  not  able  to  do  much.  By  a  Treasury 
circular  of  Oct.  9,  a  standing  offer  was  made  to  redeem 
any  four  and  one-half  per  cent,  bonds,  offered  at  par,  with 
interest  to  maturity.  Nearly  six  million  dollars'  2  worth 
were  redeemed   in  October;   but  these  bonds   were  not 

1  Figures  from  the  Bankers'  Magazine. 

2  £5,846,150. 


I96  THE   INDEPENDENT  TREASURY. 

presented  during  the  crisis  in  sufficient  amount  to  prevent 
the  accumulation  of  a  surplus  in  the  Treasury.  Accord- 
ingly Secretary  Windom  issued  a  circular  inviting  pro- 
posals for  the  sale  of  five  million  dollars  of  four  per  cent 
bonds,  redemption  to  be  made  daily  beginning  with 
Dec.  8.  The  worst  of  the  crisis  was  over  by  this  time, 
however,  and  the  only  influence  of  these  disbursements 
was  to  facilitate  settlements. 

The  verdict  on  the  question  of  the  success  of  the 
operations  of  the  Treasury  to  relieve  the  market  in  1890 
must  be  that  it  was  on  the  whole  unsuccessful.  The  very 
heavy  disbursements  in  September  increased  the  bank 
reserves  and  accomplished  considerable  good,  because 
the  elements  of  distrust  had  not  widely  developed,  and  the 
stress  of  the  situation  was  due  simply  to  the  inadequacy 
of  the  available  supply  of  money  to  do  a  suddenly  en- 
larged volume  of  business.  But  the  bank  reserves  soon 
decreased  again  by  the  movement  of  currency  to  the  inte- 
rior. This  movement,  combined  with  the  tendency  to 
export  gold  under  the  prevailing  high  rates  of  foreign 
exchange,  renewed  anxiety  in  monetary  circles.  The 
ability  of  the  government  to  furnish  help  was  known  to 
be  small,  and  instability  had  been  revealed  in  many 
establishments.  All  these  things  together  produced  dis- 
trust; and  when  failure  of  confidence  in  the  market 
occurred,  the  efforts  of  the  government  proved  of  little 
avail. 

The  principal  cause  of  the  failure  of  the  September 
disbursements  to  furnish  more  than  temporary  relief  to 
the  market  was  the  heavy  movement  of  money  to  the 
interior.  There  was  a  steady  drain  from  that  cause  all 
through  the  last  four  months  of  the  year,  with  the  excep- 
tion of  one  week.     The  loss  to  the  banks  from  this  drain 


ITS  RELATION  TO   CRISES. 


197 


aggregated  $33,272,000,  for  September  and  October.    The 
figures  '  in  detail  are :  — 


Sept.    5. 

—  $3,289,000 

Oct.    3. 

—  $  =5,78 1, 000 

"      12. 

—    3,310,000 

"    10. 

—   4,752,000 

"      19. 

—   4,411,000 

"    17- 

—    3,468,000 

"      26. 

-   3-933.000 

"    24. 

—    2,038,000 

"    3»- 

—    2,290,000 

The  main  cause  of  the  failure  to  ease  the  market  in 
the  later  stage  of  the  crisis  was  hoarding,  due  to  the  dis- 
trust that  developed,  which,  at  this  time  as  in  1873,  pre- 
vented the  money  paid  out  of  the  Treasury  from  going 
into  the  banks  where  it  would  have  been  of  service  in 
easing  the  market.  "  A  conspicuous  feature  in  the  mon- 
etary situation,"  said  the  Financial  Chronicle*  "is  the 
unaccountable  disappearance  of  the  currency  isues  made 
during  recent  months.  Taking  September  and  October 
together  the  official  figures  of  the  Treasury  Department, 
which  are  no  doubt  correct,  show  that  the  currency  afloat 
in  the  country,  that  is  in  circulation,  increased  during 
these  two  months  $62,934,675  net,  and  yet  our  New  York 
City  banks  held  on  Nov.  1  only  $99,773, 100  of  different 
kinds  of  currency,  against  a  total  of  $95,750,700  on  Aug. 
30."  The  returns  of  the  banks  in  the  interior  of  the 
country  showed  that  the  money  was  not  in  their  vaults, 
and  we  are  forced  to  conclude,  therefore,  that  it  was 
hoarded.8  The  inference  is  supported  by  the  fact  that  in 
the  first  week  of   the  new  year   the   banks   showed   an 

i  From  the  Financial  Chronicle.     The  minus  sign  indicates  loss  to  the" 
banks. 

2  November,  1892. 

3  It  is  possible  that  the  money  was  in  slow  circulation,  in  the  hands  of 
merchants  who  were  increasing  their  stocks  in  anticipation  of  higher  prices 
under  the  new  tariff  law ;  the  effect  on  the  money  market  would  be  the  same. 
Cf.  remarks  on  the  tariff  and  Sub-Treasury,  p.  144. 


I98  THE  INDEPENDENT  TREASURY. 

increase  of  reserve,  although  they  lost  money  both  to 
the  interior  and  to  the  Sub-Treasury.1 

The  conclusions  to  be  drawn  as  to  the  influence  of  the 
operations  of  the  Independent  Treasury  in  crises,  from 
the  four  periods  of  great  business  disturbance  which  we 
have  briefly  sketched,  are  various.  We  have  seen  the 
system  producing  a  stringency  at  a  time  2  when  ease  in 
the  market  was  needed  for  legitimate  business,  and  also 
at  a  time  8  when  speculation  was  rife  and  had  its  course 
retarded,  if  not  checked,  by  the  Sub-Treasury  absorptions. 
We  have  seen  that  the  output  of  money  to  relieve  a  dis- 
tressed market  may  result  in  promoting  speculation,4  or 
in  yielding  some  needed  help  to  business  men,6  or  either 
partly  or  altogether  neutralized  by  hoarding6  at  a  time 
of  lack  of  public  confidence  in  the  immediate  future  of 
business.  This  variety  of  action  is  a  conclusive  proof,  if 
proof  be  needed,  that  there  is  not  in  the  Independent 
Treasury  system  such  an  automatic  connection,  so  to 
speak,  with  business,  as  to  make  the  operation  of  the 
Sub-Treasury  responsive  to  the  sudden  exigencies  of 
the  mercantile  community  in  a  way  to  act  as  a  governor 
of  its  irregularities.  So  far  as  the  experience  we  have  ex- 
amined discloses,  the  Independent  Treasury  has  been 
useful  in  monetary  stringencies  and  crises,  if  its  absorp- 
tions have  coincided  with  a  rise  of  prices  caused  by 
speculation,  because  it  then  retards  speculation;  and 
when  its  disbursements  have  coincided  with  a  demand 
for  money  for  a  legitimate  temporary  expansion  of  busi- 
ness its  action  has  been  useful.     When   it  has  disbursed 

1  The  reserve  increased  from  $103,237,500  on  Dec.  26,  to  $105, 234,900  on 
Jan.  3,  a  gain  of  almost  two  millions.  The  net  loss  of  the  banks  to  the  Sub- 
Treasury  for  the  week  was  $100,000  and  to  the  interior  $1,500,000. 

2  In  1857.  4  As  in  1853.  6  As  in  1873  and  1S90. 

3  As  in  1857.  5  in  ,853  and  1S90. 


ITS  RELATION   TO   CRISES.  1 99 

during  speculation,  or  absorbed  during  a  healthy  business 
expansion,  it  has  done  mischief.  It  has  failed  altogether 
when  credit  was  destroyed,  and  has  at  times  made  the 
situation  worse  by  promoting  hoarding. 

Of  the  various  methods  mentioned  whereby  the  Inde- 
pendent Treasury  has  had,  or  may  have,  a  calming  influ- 
ence on  a  troubled  market,  three  are  of  importance  at 
present :  namely,  the  restraining  influence  on  banks,  which 
Secretary  Guthrie  claimed  the  system  exercises  on  a  rising 
market;  the  transfer  of  money;  and  the  redemption  of 
the  public  debt,  including  therein  the  purchase  of  bonds 
and  the  prepayment  of  interest. 

Now,  to  begin  with,  all  this  is  government  interference  l 
in  the  money  market;  and  while  the  "laissez-faire"  doc- 
trine is  no  longer  to  be  regarded  as  an  imperative  or 
invariable  rule  of  action,  yet  in  the  absence  of  any  other 
principle  to  replace  this,  government  interference  must 
justify  itself  in  each  new  field  it  enters.  There  is  no 
inherent  objection  to  its  action,  but  it  must  prove  its  use- 
fulness.    Experience,  both  in  England  and  in  this  coun- 

1  Government  interference  is  here  discussed  in  its  economic  aspect  only. 
Of  course,  the  political  argument  may  be  adduced  also,  but  it  would  be  out  of 
place  in  the  text.  The  appearance  of  the  Treasury  as  a  regulator  of  the 
money  market  was  doubtless  never  contemplated  by  the  framers  of  the  Con 
stitution,  or  of  the  act  establishing  the  financial  department  of  the  govern- 
ment. Still,  it  might  come  under  the  elastic  cloak  of  "  implied  powers." 
Moreover,  it  is  but  reasonable,  from  a  political  standpoint,  to  deprecate  the 
placing  of  so  much  power  within  reach  of  the  party  in  office,  through  its  ap- 
pointed official,  and  also  the  delegation  of  so  great  a  reponsibility  to  one  man. 
But  such  objections  must  find  their  force  in  the  fact  of  maladministration 
rather  than  in  its  possibility  ;  and  it  is  one  of  the  proudest  records  of  American 
financial  history  that  no  Secretary  of  the  Treasury  has  ever  deviated  from  the 
path  of  strict  integrity  in  the  use  of  the  tremendous  power  placed  in  his  hands 
through  the  Independent  Treasury.  Such  mistakes  as  have  been  made  have 
been  mistakes  of  judgment.  Indeed,  very  few  of  the  hundreds  of  officials  who, 
under  the  system,  have  had  charge  of  public  moneys,  have  proved  unfaithful, 
and  the  amount  lost  through  their  dishonesty  has  been  small. 


200  THE  INDEPENDENT  TREASURY. 

try,  has  shown  that  judicious  action  on  the  part  of  the 
government  may  do  much  to  prevent  a  panic,  and  success 
in  one  instance  is  all  that  is  logically  necessary  to  estab- 
lish a  case  for  future  "interference"  under  similar  condi- 
tions ;  but  this  action,  in  order  to  be  judicious,  need 
not  consist  only  in  redeeming  the  public  debt  under 
pressure  of  the  circumstances  of  a  panic.  Yet  that  is 
practically  the  only  method  open  to  us,  under  our  policy 
of  surplus  financiering,  with  an  Independent  Treasury. 
Consequently,  our  method  must  prove  its  superior  useful- 
ness or  be  condemned. 

Moreover,  that  there  is  danger  in  the  formation  of  the 
habit  of  relying  on  the  government  for  aid  in  times  of 
monetary  distress,  cannot  be  denied.  That  this  danger 
consists  in  the  promotion  of  speculation  or  in  the  diminu- 
tion of  caution  in  the  usual  conduct  of  business,  is  not, 
indeed,  proved  by  the  experience  either  of  England  or  of 
this  country.  Both  governments  have  assisted  the  busi- 
ness community  when  in  distress,  but  there  is  no  evidence 
of  any  increase  of  unsoundness  in  business  methods  on 
that  account.1  The  danger  lies  in  the  possibility  that  in 
a  time  of  great  distress  the  action  of  the  government  will 
be  pushed  by  public  clamor  to  the  point  where  its  con- 
tinued action  will  be  an  injury  to  its  own  credit,  and 
consequently,  in  the  end,  far  more  disastrous  than  its  in- 
action would  have  been.  That  this  danger  is  not  merely 
fanciful  is  shown  by  the  experience  of  1873  and  1890.  In 
the  former  year  "great  pressure  was  brought  to  bear  upon 
the  Treasury  Department "  to  loan  its  notes  on  secured 
clearing-house  certificates  as  collateral,  or  to  use  the 
money  on  hand  in  the  purchase  of  exchange,  or  to  issue 
notes  on  the  deposit  of  gold  in  the  Bank  of  England,  or 

l  For  some  remarks  on  this  subject  see  appendix,  p.  — 


ITS  RELATION   TO   CRISES.  201 

to  pay  "at  once  "  the  twenty  million  loan  of  1858,  or  to 
deposit  money  at  designated  places  to  be  used  in  the 
purchase  of  exchange  on  New  York.  There  were  even 
many  persons  "who  insisted  with  great  earnestness  that  it 
was  the  duty  of  the  Executive  to  disregard  any  and  all 
laws  which  stood  in  the  way  of  affording  the  relief  sug- 
gested by  them."  1  In  1890  some  people  demanded  the 
use  of  the  one  hundred  million  dollars  of  gold  kept  for 
redemption  of  the  greenbacks.  The  character  of  that 
fund  has  been  virtually  changed  from  that  of  a  special 
reserve,  for  the  purpose  for  which  it  was  accumulated,  to 
that  of  an  ordinary  asset.  It  is  not  a  very  long  step  from 
this  position  to  that  in  which  the  "reserve  "  may  be  used 
as  an  ordinary  asset.  If  that  step  is  ever  taken,  espe- 
cially if  it  be  in  a  time  of  panic,  the  distress  will  be 
enhanced  by  the  depreciation  of  the  credit  of  the  gov- 
ernment, especially  as  represented  by  its  notes. 

To  be  most  effective  the  help  of  the  government 
must  in  every  case  be  timely,  certain,  and  sufficient  com- 
pletely to  remove  the  danger.  But  it  is  not  always  so. 
Notably  in  the  panic  of  1873  was  the  support  of  the  pub- 
lic purse  tardy,  timid,  and  insufficient.  The  Secretary 
of  the  Treasury  did  not  undertake  to  purchase  bonds  until 
the  market  had  reached  its  breaking  point,  and  the  panicky 
feeling  could  not  be  checked,  as  fully  at  least  as  it  might 
have  been  by  earlier  action. 

The  success  of  the  effort  of  the  government  to  relieve 
a  panic  depends,  then,  largely  on  the  good  judgment  of 
the  officers  of  the  government.  Whatever  advantage  there 
is  in  it  can  hardly  be  ascribed  to  the  Independent  Treas- 
ury system.    That  system  is  merely  a  condition  precedent. 

1  See  Finance  Report  for  1S73.  See  also  Upton's  "  Money  in  Politics," 
p.  140. 


202  THE   INDEPENDENT   TREASURY. 

The  advantage  of  the  system  in  this  respect  cannot,  there- 
fore, be  urged  against  any  other  mode  of  action  for  the 
purpose,  the  success  of  which  depends  on  similar  condi- 
tions. Moreover,  it  may  fairly  be  questioned  whether 
the  failure,  or  the  stopping  short,  of  an  attempt  to  antici- 
pate or  check  a  panic  does  not  do  more  harm  than  could 
be  done  by  complete  inaction.  The  "feeling"  of  the 
money  market  is  a  very  sensitive  and  mobile  force,  and  it 
gathers  strength  as  it  acts  and  reacts  from  hopefulness  to 
despondency.  When  it  was  discovered,  for  example, 
that  Secretary  Richardson's  means  were  exhausted,  in 
September,  1873,  the  reaction  to  panic  was  marked  by  a 
noticeable  fall  in  the  prices  of  stocks. 

Still  again,  if  the  Independent  Treasury  were  by  its 
nature  a  suitable  means  of  relief,  it  should  be  available 
in  every  crisis.  To  be  so,  its  accumulations  of  money 
should  have  seme  dependence  on  the  conditions  which 
"make  money  dear."  But  this  is  not  the  case.  Its  action 
in  accumulation  is  altogether  independent  of  the  mone- 
tary situation.  It  "presses"  the  banks;  it  is  not  pressed 
by  them.  Its  vaults  may  not  be  full  when  its  aid  is  most 
needed,  as  happened  on  the  exhaustion  of  its  funds  in 
1873  and  1890. 

Another  consideration  that  detracts  from  the  possibility 
for  good  of  the  Independent  Treasury  in  a  crisis  is  the 
fact  that,  since  the  time,  manner,  and  amount  of  its  out- 
put depends  on  the  judgment  of  one  man,  the  Secretary  of 
the  Treasury,  the  money  is  very  likely  to  be  paid  out  on 
too  easy  terms.  The  purchase  of  bonds  at  the  market  rate, 
or  the  full  prepayment  of  interest,  makes  the  money  too 
easy  to  get.  Under  such  terms  the  Treasury  would  need 
an  amount  of  money  large  enough  to  supply  not  only 
those  who  were  in  real  need  of  it,  and  ready  to  make  a 


ITS  RELATION   TO    CRISES.  203 

large  sacrifice  to  obtain  it,  but  also  those  who  might  want 
it,  not  for  immediate  use,  but  for  hoarding.  To  obviate 
this  difficulty  the  bonds  should  be  purchased  at  a  suffi- 
ciently large  discount  from  the  market  value.  But  if,  on 
the  other  hand,  the  Secretary  of  the  Treasury  makes  the 
money  hard  to  get,  banks  which  need  money  and  try  to 
obtain  it  by  selling  public  securities  are  put  in  a  more 
difficult  position,  and  their  ability  to  aid  in  easing  the 
stringency  is  curtailed.  This  last  consideration  is  of 
great  importance  in  view  of  the  fact  that  the  direct  relief 
afforded  by  government  disbursements  is  measured  by  the 
money  paid  out  of  the  Treasury,  whereas  the  same  money 
deposited  in  the  banks  would  enable  them  to  discount  to 
two  or  three  times  the  amount,  thus  affording  a  larger 
measure  of  relief. 

Another  objection  that  might  be  urged  is  the  loss  to 
the  people  in  the  forced  purchase  of  bonds  at  a  high 
premium.  Secretary  Fairchild,  in  his  report  for  1888, 
writes:  "Ninety-four  millions  of  dollars  of  bonds  have 
been  secured  under  this  circular,  and  a  premium  paid  for 
the  privilege  of  buying  them  of  about  $18, 000, 000;  .  .  . 
the  saving  in  the  total  amount  of  interest  which  would 
have  been  paid  had  the  bonds  been  allowed  to  run  to 
maturity,  is  about  $27,000,000.  Had  taxation  been 
reduced  so  as  to  leave  this  money  with  the  people,  and 
if  it  is  worth  in  their  business  6  per  cent,  per  annum,  the 
total  value  of  the  money  to  them  during  the  term  which 
these  bonds  had  to  run  would  be  about  $83,000,000;  thus, 
there  is  a  resulting  loss  to  the  people  of  $56,000,000  upon 
this  transaction  alone."  This  is  not  strictly  accurate. 
It  is  impossible  to  state  exactly  the  loss  to  the  people  on 
such  a  transaction ;  first,  because  it  cannot  be  fairly 
assumed  that  the  money  left  with  the  people  would  all 


204  THE  INDEPENDENT  TREASURY. 

"fructify"  at  the  rate  of  six  per  cent. ;  and,  secondly,  be- 
cause the  amount  of  money  disbursed  by  the  government 
in  purchasing  bonds  is,  it  may  be  reasonably  assumed, 
largely  restored  to  the  channels  of  business.  The  total 
social  loss,  then,  is  composed  of  two  elements:  that 
which  arises  from  the  non-employment  of  the  money  while 
it  is  in  the  government  vaults,  and  that  which  is  caused 
by  the  fact  that,  while  the  money  is  indeed  returned  to 
business  by  the  government  payments,  it  is  likely  to  reach 
persons  other  than  those  from  whom  it  was  taken  by  tax- 
ation. Such  a  transfer  will  involve  a  social  loss,  espe- 
cially if  those  to  whom  the  money  is  paid  do  not  employ 
it  so  productively  as  those  from  whom  it  was  taken  by 
taxation.  One  of  Secretary  Windom's  transactions  in 
1890  will  serve  as  an  illustration.  Under  the  circular  of 
Sept.  13  of  that  year,  $17,071,150  of  four  percent,  bonds 
were  redeemed  at  a  cost  of  $21,617,673.77,  which  repre- 
sents a  premium  of  26.6  per  cent.  The  reduction  of 
interest  charge  from  the  transaction  was  $682,846  per 
annum.  The  bonds  were  due  in  1907,  and  had,  therefore 
about  seventeen  years  to  run.  The  amount  of  the  premium 
paid  was  $4,546,523.77.  If  the  $21,617,673  had  been 
kept  by  the  government,  and  put  out  at  interest  at  four 
per  cent.,  compounded  annually,  for  seventeen  years, 
and  the  amount  of  the  interest,  $682,846,  is  paid  every 
year  from  the  proceeds,  the  amount  which  the  government 
would  have  at  the  end  of  the  seventeen  years  for  the  pay- 
ment of  the  principal  would  be  $25,927,322.  This  would 
leave  a  surplus  of  $8,856,172,  the  present  value  of  which 
would  be  the  loss  to  the  government.  That  value  is,  of 
course,  the  premium  actually  paid. 

But  it  is  hardly  fair  to  assume  that  the  government 
would,  or  should,  invest  in  this  way.  Another  way  to 
look  at  the  matter  is  this:  If  the  government  waited  until 


ITS  RELATION   TO    CRISES.  205 

the  bonds  were  due,  it  would  in  the  mean  time  pay 
$682,846  each  year  as  interest;  and  at  the  end  of  the 
seventeen  years  it  would  pay  the  par  value  of  the  bonds. 
But  in  the  mean  time  it  would  have  the  use  of  $682,846 
for  seventeen  years,  sixteen  years,  and  so  on,  down  to  one 
year.  The  gain  or  loss  will  be  the  difference  between 
the  amount  paid,  and  the  present  worth  of  a  seven- 
teen years'  annuity  of  $682,846,  at  four  per  cent., 
plus  the  present  worth  of  the  par  value  of  the  bonds. 
From  this  standpoint,  also,  the  loss  was  the  amount  of 
the  premium.  It  must  be  borne  in  mind  that  no  one 
of  these  amounts  represents  the  social  loss,  or  the  loss 
to  the  nation  as  a  social  unit.  The  loss  spoken  of 
is  the  loss  which  the  government,  or  the  whole  people 
as  a  debtor,  sustains  to  part  of  the  people  as  creditor.1 
Moreover,  all  such  computations  are,  at  best,  only 
guesses. 

The  direct  loss  from  the  forced  purchase  of  bonds  at  a 
premium  is  not  the  only  one  to  be  considered.  The  pur- 
chase may  do  harm  in  addition  by  curtailing  bank  circu- 
lation. "It  is  difficult  to  estimate  the  full  effect  of  bond 
purchases  by  the  Secretary  of  the  Treasury  upon  the 
volume  of  circulation  of  the  national  banks,  for  while 
$24,117,400  of  bonds  were  withdrawn  and  directly  trans- 
ferred for  purchase,  about  $8,000,000  being  substituted, 
the  total  withdrawals  amounted  to  more  than  $40,000,000; 
but  undoubtedly  the  larger  part  of  the  $16,000,000  not 
withdrawn  for  transfer  were  either  placed  on  the  market 
or  were   purchased  by  the   Secretary   directly  from  the 

1  The  transaction  mentioned  was  equivalent  to  buying  bonds  at  par,  at 
about  2.1  per  cent. ;  evidently  since  the  government  could  not  have  floated  a 
new  issue  of  bonds  at  so  low  a  rate  as  that,  there  must  have  been  a  loss  on 
the  purchase  actually  made. 


206  THE   INDEPENDENT  TREASURY. 

banks  after  withdrawal. "  1  If  the  purchase  of  bonds  forces 
the  price  up  it  may  be  more  profitable  for  the  banks  to 
sell  bonds,  contract  their  issues,  and  take  advantage  of 
prevailing  high  rate  of  discounts  to  enlarge  their  loans. 

That  the  Treasury  purchases  of  bonds  may  force  their 
price  up  there  is  no  doubt.  Speaking  of  a  Treasury  offer 
to  purchase  bonds,  in  1887,  the  Financial  Chronicle2 
said: 

"  Early  in  the  week  when  it  was  represented  that  there 
would  be  no  change  in  the  Treasury  policy  prices  sharply 
declined,  and  at  times  the  market  verged  close  on  a  panic. 
On  Wednesday,  after  it  was  known  that  the  offerings  of 
four  and  one-half  per  cents,  to  the  government  had  been 
very  small,  a  recovery  took  place.  This  may  seem  para- 
doxical, but  the  theory  was  that  it  would  lead  the  govern- 
ment to  extend  the  offer  to  purchase  bonds  so  as  to  include 
the  four  per  cents.  As  this  proved  to  be  the  case  the 
very  next  day,  the  market  further  advanced,  and  it  has 
been  quite  strong  since."  3 

But  even  this  is  not  the  whole  case.  Under  cover  of 
the  excitement  of  a  panic,  influences  may  be  set  at  work 
to  "corner  the  Treasury"  and  compel  the  Secretary  to 
purchase  bonds.  That  is,  public  excitement,  worked  up 
for  the  purpose,  may  exercise  a  coercive  power.  This 
was  undoubtedly  one  element  in  the  crisis  of  1890.  Under 
cover  of  the  panic  a  combination  of  speculators,  "'short ' 
of  the  stock  market  and  'long'  of  government  bonds," 
operated  to  force  down  railroad  shares  and  force  up  gov- 
ernment bonds.     Of   course  the  purpose  was   that   the 

1  Rept.  Comptroller  of  the  Currency,  1890.     Cf.  Ibid.  1888,  p,  453. 

2  Sept.  24,  18S7. 

3  See  also  pp.  176,  180. 


ITS  RELATION  TO    CRISES.  20J 

"shorts"  might  "cover''  at  a  profit,  and  that  the  others, 
in  the  apprehension  created,  might  compel  the  Secretary 
of  the  Treasury  to  relieve  the  market  and  enable  them  to 
sell  their  bonds.  That  there  was  some  such  combination 
seems  probable  from  the  fact  that,  although  the  Treasury 
purchased  heavily  up  to  the  17th  of  September,  the  bulk 
of  the  money  went  outside  of  New  York,  but  that  all 
paid  out  on  that  day  —  on  the  consummation  of  the  plan 
—  remained  in  the  city.1 

From  the  foregoing  considerations  it  appears  that  the 
use  of  the  Independent  Treasury  for  affording  relief  in 
a  panic  by  means  of  the  money  accumulated  in  the  course 
of  its  operations  is  not  a  satisfactory  mode  of  accom- 
plishing that  purpose.  Its  aid  is  arbitrary  in  method, 
very  likely  to  be  misdirected,  generally  insufficient  as 
rendered,  and  actually  promotive  of  injury  by  stimulat- 
ing speculation,  and  by  making  it  more  difficult  for  the 
banks  to  replenish  and  keep  intact  their  reserves.  Even 
when  it  is  helpful,  the  aid  which  the  Independent  Treas- 
ury can  render  is  measured  by  the  amount  of  its  disburse- 
ments, and  the  maximum  effect  of  this  aid  must  be  lessened 
by  the  easy  conditions  under  which  it  is  offered;  or  else, 
if  these  conditions  are  made  harder,  the  aid  which  the 
banks  could  otherwise  render  is  diminished,  and  counter- 
acts to  a  certain  extent  the  good  effect  of  the  Treasury 
operations.  Moreover,  the  good  done  by  the  Sub-Treas- 
ury expansions  is  less  in  a  delicate  condition  of  the 
market  than  the  evil  done  by  its  contractions.  For  con- 
traction of  the  currency  is  quicker  to  produce  distrust 
than  expansion  is  to  restore  confidence. 

The  limitations  of  the  usefulness  of  the    Independent 

1  See  Banker's  Magazine,  Oct.  1890. 


208  THE  INDEPENDENT   TREASURY. 

Treasury  for  the  relief  of  business  when  distressed  are, 
then,  very  great.  The  helpfulness  of  an  expansion  of 
the  currency  in  calming  the  disturbance,  whether  by 
the  Treasury,  or  by  banks,  will  depend  in  part  on  the 
nature  of  the  crisis  and  its  degree  of  severity.  The 
Independent  Treasury  has  all  the  limitations  of  banks  in 
an  attempt  to  relieve  a  crisis,  besides  many  of  its  own. 
For  even  the  banks  are  limited  in  such  cases  by  the  fact 
that  under  certain  circumstances  something  more  than 
an  expansion  of  the  currency  is  needed  to  give  ease  to 
business.  A  short  examination  of  the  character  of  cri- 
ses will  bring  out  more  clearly  the  limitations  common  to 
both  the  banks  and  the  Independent  Treasury.  If  the 
disturbance  is  in  its  origin  due  simply  to  a  lack  of  money, 
while  business  is  in  an  otherwise  healthy  condition,  an 
expansion  of  the  currency,  whether  by  an  increase  of  bank 
discounts  or  notes,  or  by  an  outpour  of  a  Treasury  sur- 
plus, will  relieve  the  crisis  and  prevent  a  panic  ;  but  if 
the  expansion  is  due  to  the  Independent  Treasury,  this 
result  will  be  attained,  as  we  have  seen,  with  more  or  less 
success,  according  to  the  skill  of  the  Secretary  of  the 
Treasury.  Even  if  a  crisis  becomes  a  panic,  and  is 
accompanied  by  a  complete  breakdown  of  the  circulating 
medium,  as  in  1857,  an  Independent  Treasury  could, 
under  certain  conditions,  do  much  to  ease  the  situation. 
But  such  a  case,  as  has  been  already  remarked,  is  not 
now  among  the  possibilites. 

If,  however,  the  crisis  be  an  industrial  one,  an  expan- 
sion of  the  currency,  whatever  its  source,  can  be  of  little 
avail.  A  difficulty  of  this  kind  is  due  to  a  falling  off  of 
demand  for  goods  in  some  line,  or  lines,  of  production. 
This  lessening  of  demand  may  be  caused  either  by  some 
change  of  custom  or  mode  of  life,  or  by  cheaper  pioduction 


ITS  RELATION'  TO   CRISES.  2(X) 

elsewhere,  or  by  the  too  rapid  transmutation  of  circulat- 
ing capital  into  fixed  capital.  In  this  case  the  difficulty 
is  likely  to  be  lasting,  and  any  increase  of  the  amount 
of  money  afloat  can  have  but  little  effect  unless  it  is 
great  enough  and  prolonged  enough  to  enable  debtors  to 
"hold  on"  until  the  new  fixed  capital  begins  to  make 
a  return  on  the  investment.  But  this  is  usually  a  matter 
of  many  months,  or  even  years,  and  is  too  long  a  period 
to  be  influenced  by  temporary  inflations  or  contractions 
of  the  currency.  Hence,  even  if  there  had  been  money 
enough  in  the  Treasury  to  satisfy  all  demands  for  it  in 
that  fatal  third  week  of  September,  1873,  for  example, 
the  crash  would  not  have  been  avoided,  but  only  post- 
poned. It  might  not  have  been  so  great,  for  many  of 
the  enterprises  that  had  been  undertaken  proved  sound 
ultimately;  but  many  others  were  incapable  of  repayngthe 
outlay  on  them,  at  least  for  a  long  time,  and  some  not 
at  all.     These  had  to  collapse. 

The  immediate  cause  of  the  culmination  of  an  indus- 
trial crisis  into  a  panic  is  loss  of  confidence.  This  is  also 
the  ultimate  cause  of  commercial  panics,  and  may  be  due 
to  some  slight  accident  that  throws  suspicion  on  firms 
previously  supposed  to  be  perfectly  "sound,"  or  to  a  wise 
conclusion  on  the  part  of  traders  that  speculation  has  gone 
too  far.  Whatever  its  cause,  a  breakdown  of  confidence 
puts  a  crisis  beyond  the  influence  of  Treasury  dis- 
bursements, as  we  saw  was  the  case  in  1873.  What  is 
needed  at  such  a  time  is  a  restoration  of  confidence,  and 
confidence  can  be  restored  only  by  a  period  of  quiet. 
Time  must  be  allowed  for  the  events  of  the  crisis  to  pass 
from  men's  minds.  "The  track  must  be  cleared  of  the 
wreck.  The  places  left  vacant  by  the  casualties  of  the 
great   crash  must  be  filled  by  new  men."     The  sting  of 


2IO  THE  INDEPENDENT  TREASURY. 

failure  must  cease  to  be  felt,  the  memory  of  dishonored 
credit  must  be  allowed  to  grow  dim,  new  grounds  of 
confidence  must  be  seen,  sound  conditions  of  business 
must  be  re-established.  With  all  of  this  the  temporary 
absorptions  and  disbursements  of  money  by  the  Treasury 
have  nothing  directly  to  do.  There  can  be  no  restoration 
of  business,  and  no  rehabilitation  of  prices,  until  credit 
is  restored.  For  prices  are  affected  by  the  variations  in 
the  compound  purchasing  medium  of  credit  and  money, 
and  credit  is  relatively  the  more  important  of  the  two.1 
Indeed,  at  such  times  money  may  be  plentiful,  as  indi- 
cated by  the  prevailing  rates  of  discount.  But  "cheap 
money  does  not  necessarily  mean  active  speculation  and 
high  prices.  We  have  had  our  lowest  prices  and  most 
stagnant  markets  when  bank  vaults  were  phenomenally 
overloaded."2  A  further  outpour  of  money  would  there- 
fore prove  useless.  And,  indeed,  it  is  extremely  doubtful 
whether  it  is  wise,  in  a  so-called  capital 3  panic,  to  try  to 
devise  means  whereby  all  the  enterprises  endangered  by 
shaken  credit  may  be  preserved.  Many  of  them  are  of 
such  a  character,  that  the  interests  of  society  will  be  better 
served  by  their  destruction.  The  difficulty  is  that  their 
undertakers  usually  involve  others  in  their  downfall,  and 
the  saving  of  these  others  is  a  legitimate  and  desirable 
object,  even  although  its  accomplishment  involves  some 
support  of  undertakings  that  are  unsound. 

Finally,  the  questions  must  be  considered  whether  the 
Independent  Treasury  may  not  have  an  influence  in  cre- 
ating   stringencies  which    it  afterwards   undertakes    to 

i  Cf.  Taussig's  "The  Silver  Situation."  Public,  of  the  Amer.  Econ. 
Assoc,  vol.  vii.,  no.  I,  p.  63. 

2  E.  B.  Andrews's  "  An  Honest  Dollar.-'  Ibid.,  vol.  iv.,no.  6,  p.  8. 

3  A  too  rapid  transmutation  of  circulating  to  fixed  capital. 


ITS  RELATION  TO   CRISES.  211 

relieve,  and  at  what  period  of  a  crisis  its  help  is  most 
efficacious.  As  we  have  already  seen,1  Secretary  Guthrie 
praised  the  Independent  Treasury  in  1856,  on  the 
ground  that  it  exercises  a  restrictive  influence  on  the 
banks  when  "over-trading"  takes  place,  and  so  pre- 
serves "the  general  prosperity."  The  restriction  is  an 
indubitable  fact.  Is  its  result  beneficial?  The  answer 
can  be  obtained  only  by  an  analysis  of  the  general  con- 
ditions of  a  crisis.  The  series  of  phenomena  of  a  crisis, 
of  whatever  class,  may  be  ultimately  due  either  to  what 
are  known  as  speculative  causes,  or  to  any  change  in  the 
business  situation  which  gives  rise  to  an  increased  demand 
for  one  or  more  commodities,  or  to  a  shortened  supply  of 
them,  and  so  arouses  hopes  of  larger  profits  than  usual. 
The  first  class  of  conditions  is  sometimes  known  by  Sec- 
retary Guthrie's  word,  " over-trading."  That  happens 
"  when  an  impression  prevails,  whether  well  founded  or 
groundless,  that  the  supply  of  one  or  more  great  articles 
of  commerce  is  likely  to  fall  short  of  the  ordinary  con- 
sumption. In  such  circumstances  all  persons  connected 
with  those  commodities  desire  to  extend  their  operations. 
The  producers  or  importers  desire  to  produce  or  import  a 
larger  quantity;  speculators  desire  to  lay  in  a  stock,  in 
order  to  profit  by  the  expected  rise  of  price,  and  holders  of 
the  commodity  desire  additional  advances,  to  enable  them 
to  continue  holding.  All  these  classes  are  disposed  to 
make  a  more  than  ordinary  use  of  their  credit.".  .  . 
"Thus  a  rise  of  price  for  which  there  were  originally  some 
rational  grounds,  is  often  heightened  by  merely  specula- 
tive purposes,  until  it  greatly  exceeds  what  the  original 
grounds  will  justify."2     Under  this  stimulated  demand 

1  See  page  59. 

2  Mill's  Political  Economy,  Book  III.,  chap.  24,  §  2,  and  chap.  12,  §  3. 


212  THE  INDEPENDENT  TREASURY. 

prices  advance  still  more,  until  the  tide  turns  and  the 
collapse  comes.  This  occurs  when  the  holders  of  the 
commodity  are  unable  to  borrow  further,  and  so  must  sell 
to  meet  their  obligations.  This  time  comes  when  the 
banks  feel  the  necessity  of  contracting  their  discounts, 
a  necessity  that  is  hastened  by  the  drain  of  the  precious 
metals  which  the  rise  in  prices  almost  invariably  causes. 
In  what  way  is  this  course  of  events  influenced  by  the 
action  of  the  Independent  Treasury  ?  As  the  rise  in  prices 
is  in  this  case  supposed  to  be  due  wholly  or  mainly  to 
speculation,  evidently  any  influence  that  opposes  the 
speculative  spirit  will  retard,  perhaps  check,  the  rise  of 
prices,  and  may  prevent  their  reaching  a  point  of  danger. 
The  retarding  influence  usually  operative  in  such  cases  is 
the  export  of  the  metals ;  but  any  other  cause  tending 
to  contract  the  currency  will  have  a  similarly  beneficial 
effect.  The  absorption  of  money  by  the  Independent 
Treasury  is  such  a  cause,  and  may,  therefore,  be  re- 
garded as  herein  beneficial.  It  not  only  diminishes  the 
amount  of  money,  but,  as  it  draws  mostly  from  the 
banks,  it  at  the  same  time  diminishes  their  power  to  lend. 
Hence  it  may  exercise  a  powerful  restraining  influence 
on  speculation,  because  it  will  arrest  speculative  exten- 
sions of  credit  at  an  earlier  stage,  with  a  less  drain  of 
gold.  As  the  amount  of  their  own  notes  which  banks  have 
to  loan  is  limited,  deposits  are  their  chief  means  of 
discount.  Hence  the  rate  of  interest  must  rise  imme- 
diately when  the  demand  for  loans  trenches  on  the  de- 
posits beyond  a  certain  point,  loans  become  more  diffi- 
cult to  get,  and  speculation  is  checked.  This  process  is 
made  to  begin  earlier  if  the  Treasury  is  absorbing  money 
at  the  same  time.  Its  restriction  of  the  banks  under 
these  circumstances  "  is  a  real  impediment  to  their  mak- 


ITS  RELATION  TO   CRISES.  213 

ing  those  advances  which  arrest  the  tide  at  its  turn  and 
make  it  rush  like  a  torrent  afterwards."  The  Indepen- 
dent Treasury  can  exert  such  an  influence,  however,  only 
when  its  absorption  of  money  coincides  with  this  stage 
of  the  stringency.  A  certain  guaranty  that  such  coin- 
cidence will  occur  is  found  in  the  fact  that,  under  the 
circumstances  described,  the  export  of  the  metals  gener- 
ally implies  import  of  commodities  and  consequent  pay- 
ment of  custom  dues.  But  such  coincidence  can  be 
regarded  as  certain,  only  when  the  speculation  affects 
commodities  which  are  imported  subject  to  duty.  Under 
our  inclusive  tariff  system  such  articles  will  generally  be 
thus  affected,  however ;  and  we  may,  therefore,  regard  the 
effect  of  our  Independent  Treasury  as  usually  beneficial 
in  this  phase  of  the  inflation  of  prices. 

There  are  still  other  sets  of  conditions  in  a  specula- 
tive market.  Exchange  may  be  in  favor  of  this  country, 
prices  may  be  rising,  and  yet  there  may  be  a  drain  of 
gold.  This  was  the  case  in  1890.  Under  such  circum- 
stances, in  so  far  as  the  gold  we  lose  belongs  to  foreign 
creditors,  no  action  we  can  take  will  prevent  our  losing 
it  if  its  owners  are  in  great  need,  as  seems  to  have  been 
the  case  at  the  time  mentioned.  Its  loss,  of  course, 
may  injure  us  by  contracting  the  currency  and  obviously 
any  further  contraction  by  the  locking  up  of  money  in  the 
Treasury  vaults  must  then  be  an  additional  injury.  But 
if  the  gold  is  going  abroad,  attracted  by  higher  rates 
of  interest,  as  when  the  Bank  of  England  by  arbi- 
trarily raising  its  rate  of  discount  tends  to  raise  the  rate 
generally  in  the  kingdom,  then  the  Treasury  action  will 
tend  to  keep  the  gold  here,  by  making  it  temporarily 
scarcer.  The  export  will  not  stop  until  the  scarcity  of 
money  here  raises  the   rate  of  discount  to  a  point  where 


214  THE   INDEPENDENT  TREASURY. 

the  home  rate,  plus  cost  of  carriage,  will  be  about  equal 
to  the  foreign  rate.  But  nothing  is  gained  by  this. 
Money  becomes  scarcer  just  the  same.  What  we  would 
have  lost  by  export  is  locked  up  by  the  government. 

When,  however,  speculation  has  attained  its  culmina- 
tion, when  the  point  of  danger  is  reached,  and  a  collapse 
of  prices  is  threatened,  the  situation  is  different.  The 
need  is  for  free  discounting  at  high  rates;  but  the 
amount  of  loans  that  the  banks  can  give  is  limited, 
because  a  large  amount  of  money  that  would  otherwise 
be  at  their  disposal  is  locked  in  the  vaults  of  the 
Treasury.  Now  the  influence  of  the  system  is  evil.  The 
evil  is  lessened,  indeed,  if  the  money  is  at  once  disbursed ; 
but,  as  already  pointed  out,  the  money  usually  comes 
out,  if  it  comes  at  all,  under  conditions  that  lessen  its 
usefulness  in  calming  a  panic  or  relieving  a  stringency. 

If,  however,  the  monetary  stress  is  caused  not  by  an 
advance  of  prices  under  the  stimulus  of  speculation,  but 
by  some  cause  withdrawing  capital  from  the  market,  the 
whole  case  is  different.  Such  are  times  when,  for  ex- 
ample, heavy  foreign  payments  have  to  be  made,  or  when 
there  is  a  rapid  transmutation  of  circulating  into  fixed 
capital.  Such  drafts  are  met  either  by  the  withdrawal  of 
deposits  from  the  banks,  or  by  the  sale  of  property,  as 
securities,  or  by  the  contraction  of  loans.  In  any  case, 
the  source  of  loans  is  curtailed,  the  rate  of  discount  rises, 
loans  are  made  only  on  "prime  "  security,  and  "shaky  " 
houses  go  down,  probably  involving  in  their  ruin  some 
that  are  virtually  solvent.  The  cause  of  the  evil  in  this 
series  of  phenomena  is  the  reducton  of  loanable  funds. 
Any  influence  contributing  to  that  reduction  intensifies 
the  evil.  The  locking  up  of  money  in  the  vaults  of  the 
Independent    Treasury  is   such   an    influence,    and  that 


ITS  RELATION   TO    CRISES.  21  5 

action  is  therefore  bad.  The  results  will  come  about  if 
the  absorption  by  the  Independent  Treasury  coincides 
with  the  withdrawal  of  money  from  the  market  for  any  of 
the  purposes  indicated.  When  the  money  comes  out  of 
the  Treasury  again,  if  the  need  still  exists  for  drafting  it 
for  any  of  the  objects  mentioned,  the  disbursement  will  be 
good,  unless  it  is  made  in  a  way  to  encourage  hoarding. 
If,  however,  the  disbursement  is  delayed  until  the  mar- 
ket has  turned  and  prices  have  adjusted  themselves  to  a 
lower  level,  it  can  do  little  or  no  good. 

The  substance  of  this  analysis,  then,  is  that,  so  far  as 
crises  are  concerned,  the  Independent  Treasury  exercises 
a  beneficial  influence  only  in  the  early  stages  of  a  crisis 
caused  by  a  speculative  advance  of  prices;  that  in  the 
later  stages  of  such  an  occurrence  its  influence  is  evil  to 
a  greater  or  less  degree,  according  as  its  receipts  happen 
to  exceed  or  to  be  less  than  its  disbursements ;  that  in  a 
stringency  caused  by  a  rapid  but  healthy  increase  of  busi- 
ness, its  absorptive  influence  is  wholly  bad,  but  that  in 
the  later  stage  of  such  a  crisis  its  disbursements  are  pro- 
motive of  good,  unless  mismanaged  or  too  long  delayed. 

Hence  we  see  that  the  coincidence  of  a  particular  phase, 
or  stage,  of  the  action  of  the  Sub-Treasury  with  a  particu- 
lar phase,  or  stage,  of  the  progress  of  a  crisis,  is  neces- 
sary in  order  that  the  influence  of  the  Sub-Treasury  may 
be  beneficial.  But  such  a  coincidence  is  purely  fortuitous, 
and  this  fact  deprives  the  system  of  all  value  as  a  scien- 
tific mode  of  relief  in  crises. 

Moreover,  whatever  support  for  the  continued  existence 
of  the  system  is  found  in  the  aid  it  renders  the  commu- 
nity when  in  financial  distress,  will  soon  be  taken  away. 
It  cannot  be  long  before  the  public  debt  will  be  so  re- 
duced that  any  succor  from  the  purchase  of  bonds  by  the 


216  THE   INDEPENDENT  TREASURY. 

Treasury  will  be  of  but  little  avail.  If  the  policy  of 
surplus  financiering  be  continued  after  that,  the  only 
apparent  way  in  which  the  government  will  be  able  to 
aid  in  a  crisis  will  be  by  lending  its  money  directly  to 
those  who  need  it,  or  by  depositing  it  in  the  banks.  The 
former  policy  is  altogether  out  of  the  question.  The 
latter  has  already  been  a  matter  of  discussion,  and  has 
been  tried  to  a  certain  extent.  Its  consideration  must  be 
reserved  for  the  next  chapter. 


PROPOSALS  FOR   REPLACEMENT.  21 7 


CHAPTER   VIII. 

PROPOSALS    FOR  THE    REPLACEMENT  OF    THE    INDEPENDENT 

TREASURY. 

The  trend  of  our  conclusions  drawn  from  the  working 
of  the  Sub-Treasury  system  to-day  is  that  the  harm  done 
by  it  is  greater  than  the  good,  which  is  the  opposite 
of  what  was  true  when  the  system  was  established.  At 
present  the  only  important  advantages  of  the  system  are 
its  occasional  accidental  restriction  of  the  expansion  of 
bank  loans  under  the  influence  of  speculation,  the  cer- 
tainty that  the  government  can  get  its  money  for  use 
promptly  without  disturbing  the  market,  and  its  occa- 
sional assistance  in  stringencies  and  crises.  But  of  even 
these  advantages  the  first  and  third  are  uncertain,  and 
the  system  is  a  continued  source  of  disturbance  to  the 
money  market  and  the  banks. 

The  independent  treasury  system  is  an  excellent  illus- 
tration of  two  very  important  facts,  for  the  consideration 
of  which  it  is  worth  while  to  make  a  short  digression. 
These  are  the  practical,  make-shift  policy  of  English 
and  American  administration,  and  what  has  been  called 
the  relativity  of  institutions.  When  part  of  the  machin- 
ery of  administration  is  found  to  work  badly,  or  when 
conditions  arise  which  were  not  contemplated  at  the  time 
the  administrative  system  was  planned,  the  usual  Anglo- 
American  way  of  meeting  the  difficulty  is,  not  to  create 
a  new  system,  but  to  patch  and  twist  the  old  one  to  make 
it  do  the  new  work  or  meet  the  new  conditions.     The 


2l8  THE   IXDEPENDENT  TREASURY. 

result  is  often,  from  a  scientific  or  systematic  standpoint, 
a  grotesque  aggregation  of  unrelated  details,  which, 
however,  is  made  to  work  with  reasonable  smoothness 
in  practice,  by  the  adaptability  and  hard  common-sense 
of  the  race.  Witness,  for  example,  that  bundle  of 
incongruities  and  political  and  administrative  manikins 
called  the  English  Constitution.  Or,  as  a  less  impor- 
tant illustration,  consider  the  heterogeneous  organiza- 
tion of  our  own  Treasury  department.  The  same  method 
obtains  in  our  political  life  and  our  law.  A  defect  in 
either  is  not  always  remedied  by  reconstruction,  but  by  an 
addition  to  meet  new  requirements. 

Two  important  practical  results  flow  from  this  Anglo- 
American  mode  of  progress.  One  is  that  it  prevents  any 
of  those  sudden  overturning  of  institutions  such  as  are 
so  common  among  the  Latin  races,  for  example.  Revo- 
lutions with  us  are  gradual.  The  other  consequence  of 
the  custom,  really  a  corollary  of  the  former,  is  that  gen- 
eral schemes  of  reconstruction  and  reform  are  looked  at 
askance  by  our  people.  Consequently,  proposals  to 
change  any  existing  institution,  if  they  are  to  receive 
consideration,  must  not  depart  very  widely  from  the  sys- 
tem already  existing.  Any  proposed  new  plan  must  be 
based  as  far  as  possible  on  that  in  vogue  already,  if  it 
is  to  meet  with  such  general  approval  as  will  insure  its 
early  adoption.  This  fact  has  an  important  bearing  on 
any  proposal  that  may  be  made  to  amend  our  Independent 
Treasury  system.  It  is  better  to  keep  a  system  whose 
evils  we  know,  than  to  adopt  an  entirely  new  one,  built 
on  an  ideal  plan,  whose  defects  we  can  only  guess. 

There  is  really  a  deep  philosophical  reason  for  the 
race  custom  we  are  discussing.  Its  immediate  explana- 
tion is,  of  course,   the  innate  conservatism  of  the   race. 


PROPOSALS  FOR   REPLACEMENT.  219 

But  it  is  really  an  unconscious  adherence  to  the  truth 
contained  in  the  doctrine  of  the  relativity  of  institutions, 
which  is  the  topic  of  the  second  of  the  digressions  men- 
tioned. It  is  a  recognition  of  the  truth  that  every  exist- 
ing institution  has  served  a  purpose,  has  met  a  want,  has 
had  a  reason  for  its  creation.  The  truth  contained  in 
the  doctrine  of  the  relativity  of  institutions  is  simply 
that  at  the  time  of  adoption  of  a  particular  institution  or 
political  method  not  all  of  the  data  were  known  or  under- 
stood for  a  scientific,  that  is,  a  universal  and  permanent, 
solution  of  the  problem  on  hand.  It  does  not  follow  from 
that  doctrine,  as  is  sometimes  assumed,  that  old  systems 
and  methods  should  be  replaced  with  others  entirely 
new;  or,  as  is  also  sometimes  assumed,  that  no  scientific, 
that  is,  universal  and  permanent,  system  of  politics  and 
economics  is  possible.  Natural  social,  political,  and 
economic  laws  are  not  proved  to  have  no  existence 
because  thus  far  in  the  world's  history  there  are  many 
departments  of  life  in  which  no  system  has  been  found 
that  will  serve  all  nations  and  ages. 

A  claim  of  this  kind  might  be  made  in  the  case  of  any 
science.  Because,  for  instance,  there  is  some  truth  in  the 
statement  that  "morality  varies  with  the  latitude,''  it 
does  not  follow  that  there  is  no  eternal,  immutable  law 
of  right  and  justice.1  So  in  Sociology,  the  fact  that  so- 
cial, political,  and  economic  institutions  have  varied, 
grown  useless,  and  decayed,  does  not  prove  the  impossi- 
bility of  a  universal  solution  of  the  problems  these  insti- 
tutions have  tried  to  solve.  We  may  yet  hope  that  some 
time  there  will  be  discovered,  for  instance,  a  scientific 
law  of  banking  and  a  universal  and  permanent  solution 
of  the  vexed  paper-money  question. 

l  Cf.  Janet's  "  Theory  of  Morals,"  pp.  161  —  162,  309  ff. 


220  THE  INDEPENDENT  TREASURY. 

The  bearing  which  the  subjects  of  these  two  digressions 
have  on  the  subject  in  hand  is  both  close  and  important. 
Any  proposals  looking  towards  the  remedying  of  the  evils 
of  the  Independent  Treasury  system  should  have  reference 
to  both  of  them.  Such  proposals  should  look  therefore 
rather  towards  a  modification  than  a  complete  supplant- 
ing of  the  system;  should  recognize  the  fact  that  the  sub- 
treasury  system  was  created  to  meet  a  special  need,  which 
still  exists,  although  the  development  of  the  country  has 
given  rise  to  other  needs  whose  importance  is  only  sec- 
ondary to  that  which  the  Sub-Treasury  was  designed  to 
meet. 

The  primary  purpose  of  the  adoption  of  the  Indepen- 
dent Treasury  was  the  safety  of  the  public  money.  It  is 
unnecessary  to  recall  in  detail  the4  viciousness  of  the 
banking  system  that  prevailed  at  that  time,  for  it  is 
familiar  to  all  students  of  our  financial  history.  To 
have  continued  to  intrust  the  public  money  to  the  banks, 
as  they  were  then  constituted,  would  have  been  to  invite 
frequent  embarrassment  and  often  positive  loss  to  the  gov- 
ernment. It  may  be  said,  indeed,  that  the  deposits  of 
the  nation  would  have  been  safe  enough  if  the  life  of  the 
second  United  States  bank  had  been  prolonged,  and  that 
the  political  strife  that  brought  about  its  destruction  was 
the  cause  which  made  the  creation  of  the  Sub-Treasury 
system  necessary.  It  is  true  that  up  to  a  certain  time  the 
public  deposits  in  that  bank  were  safe,  and  that  the  rea- 
sons for  its  overthrow  were  political  rather  than  economic. 
But  whatever  view  one  may  take  of  the  political  motives 
and  measures  that  caused  its  downfall,  there  is  good 
reason  for  thinking  that  its  preservation  as  a  semi-public 
institution  would  have  become  impossible  in  any  event; 
and  certainly  there  was  no  likelihood  at  all  of  permanent 


PROPOSALS  FOR  REPLACEMENT.  221 

safety  for  the  public  deposits  in  the  banks  that  succeeded 
the  national  institution.  Some  means  had  therefore  to 
be  devised  to  secure  safety,  and  under  the  prevailing 
public  opinion  no  better  means  could  have  been  found 
than  that  which  provides  that  the  government  should 
keep  its  money  in  its  own  vaults.  This  plan  had  its  pecu- 
liar dangers,  to  be  sure.  It  exposed  the  public  money 
to  risk  of  loss  from  accident  and  from  peculation  at  the 
hands  of  the  inexperienced  officials  who  were  necessary 
under  the  new  system.  But  there  is  no  reason  to  think 
that  these  were  personally  less  honest  than  the  officers 
and  employees  of  the  banks ;  and  they  were  probably  fewer 
in  number,  and  less  exposed  to  the  temptation  of  using 
the  public  money  for  their  personal  ends,  because  they 
had  not  the  facilities  for  using  it  which  were  open  to 
those  employed  in  the  banks. 

A  second  purpose  of  the  establishment  of  the  Independ- 
ent Treasury  was  to  furnish  a  safe  currency.  This  was  one 
of  the  purposes  for  which  the  second  national  bank  had 
been  chartered;  and  it  was  claimed,  with  some  show  of 
reason,  that  the  purpose  had  not  been  fulfilled  by  that 
institution.  After  the  fall  of  the  national  bank,  there 
was  no  method  available  for  the  provision  of  a  safe  cur- 
rency, and  for  its  regulation,  except  for  the  government 
to  undertake  the  matter  itself.  This  plan,  again,  to  be 
sure,  had  objections  peculiar  to  itself.  Treasury  notes  as 
well  as  bank  notes  would  depreciate  under  certain  cir- 
cumstances, and  the  government  could  not  on  all  occa- 
sions make  all  its  payments  in  specie.  Yet  under  the 
circumstances  the  government  issues  were  incomparably 
superior. 

But  in  providing  for  the  safety  of  the  public  funds  and 
for  a  safe  currency,  the  Independent  Treasury  did  not 
provide,  at   least  sufficiently,  for  elasticity  in  the  circu- 


222  THE  INDEPENDENT  TREASURY. 

lating medium;  nor  did  it  insure  business  against  disturb- 
ances due  to  the  alternate  and  arbitrary  contractions  and 
expansions  of  the  currency  which  its  operations  caused. 
These  evils,  indeed,  were  at  that  time  of  less  moment, 
because,  as  we  have  seen,  the  financial  operations  of  the 
government  were  not  sufficiently  large  to  do  much  harm. 
To-day  the  situation  is  different.  The  need  of  elasticity 
and  the  necessity  for  the  prevention  of  disturbance  by 
the  Treasury  operations,  have  become  of  greater  im- 
portance as  the  business  of  the  country  has  expanded. 
While  in  1846  the  Treasury  was  comparatively  isolated 
from  the  business  of  the  country,  the  influence  of  its 
operations  now  is  felt  in  every  direction;  there  is  scarcely 
an  industry  in  the  country  that  is  not  more  or  less  affected 
by  its  operations.  "The  annual  and  daily  transactions 
of  the  Treasury  have  become  so  large,  its  financial  opera- 
tions and  movements  touch  the  interests  of  the  people  at 
so  many  points,  that  great  care  should  be  taken  to  avoid 
any  unnecessary  friction.  As  the  country  increases  in 
wealth  and  population,  with  the  consequent  increase  of 
its  revenues  and  disbursements,  it  will  be  found  impos- 
sible to  continue  the  system  in  its  present  form."  1 

As  the  national  debt  is  reduced,  it  becomes  more 
difficult  so  to  adjust  the  purchase  of  bonds  as  to  furnish 
relief  to  the  money  market  at  times  when  it  is  strained. 
"As  these  derangements  happen  almost  invariably  at  the 
time  of  the  moving  of  the  crops  of  the  country,  this  state- 
ment is  equivalent  to  saying  that  every  productive  inter- 
rest  in  the  country  must  pay  toll  to  foreign  buyers  through 
the  lower  range  of  prices  which  obtain  at  such  times, 
because  of  the  fact  that  our  arrangements  for  collecting 

1  Report  U.  S.  Treasurer.  1SS6.  pp.  67-68. 


PROPOSALS  FOR  REPLACEMENT.  223 

and  disbursing  our  revenue  are  so  defective  as  to  need  an 
artificial  and  violent  remedy  in  order  to  place  in  active 
circulation  the  moneys  withdrawn  from  the  business  of 
the  country."  l 

Of  course,  safety  for  the  public  money  is  as  necessary 
now  as  it  ever  was;  but  it  can  be  secured  in  other 
ways.  The  public  money  on  deposit  in  banks  is  in  far 
less  danger  of  loss  to-day  than  at  any  previous  period  of 
our  history.  "The  painful  experiences  of  1839-40,  and 
the  active  discussion  of  the  principles  of  money  and 
banking  which  they  called  forth;  the  growth  of  a  public 
sentiment  condemning  an  excess  of  paper  issues,  and  the 
formulation  of  precepts,  more  or  less  carefully  observed 
by  bank  managers ;  a  vast  improvement  in  the  commer- 
cial morality  of  the  country,  due  partly  to  education,  and 
even  more  to  the  development  of  manufactures  which,  to 
a  vastly  greater  degree  than  agriculture,  rest  on  good 
faith  and  commercial  honesty;  the  shortening  of  the  terms 
of  credit. —  these  causes  [with  others]  served  to  place  the 
paper-money  issues  of  the  United  States  on  an  improved 
basis  between  1840  and  i860.''2  General  Walker  might 
also  have  added  that  these  causes  have  rendered  the 
safety  of  deposits  also  more  secure,  and  that  the  more 
recent  development  of  banking  has  been  marked  by  even 
a  steadier  and  greater  improvement  in  respect  to  the 
safety  of  both  issues  and  deposits. 

Since  the  safety  of  the  public  money  can  be  secured  as 
well  in  some  other  way  as  by  the  Independent  Treasury; 
and  since  that  system  under  present  conditions  produces 
effects  that  are  of  great  injury  to  business,  the  question 
naturally  arises  whether  some  method  cannot   be  found 

1  Report  U.  S.  Treasurer,  1SS6.  pp.  67-68. 

2  F.  A.  Walker's  "  Political  Economy,''  p.  443. 


224  THE   INDEPENDENT  TREASURY. 

whereby  the  evils  of  the  system  can  be  largely  or  wholly 
obviated,  while  yet  its  good  points  shall  be  conserved; 
some  method  which  shall  continue  the  insurance  of 
safety,  but  shall  provide  for  greater  and  more  automatic 
elasticity  of  the  currency;  shall  put  an  end  to  the  disturb- 
ance of  business  by  arbitrary  absorptions  and  disburse- 
ments, shall  prevent  the  occurrence  of  stringencies  in  the 
money  market  from  government  operations,  but  shall  yet 
furnish  a  means  of  affording  relief  in  crises  to  as  great 
an  extent,  at  least,  as  the  Independent  Treasury  does 
now.  Safety  is,  of  course,  the  prime  requisite.  Its  loss 
could  not  be  offset  by  any  other  advantage  that  could  be 
secured.  That  the  Treasury  shall  get  its  money  when  it 
needs  it,  in  full,  freely  and  promptly,  is  the  most  impor- 
tant consideration,  and  no  proposal  that  does  not  provide 
for  that  end  should  be  considered  for  a  moment. 

The  experience  of  other  countries  in  such  matters  is 
valuable  and  usually  suggestive  of  improvements,  and  a 
short  account  of  the  methods  in  use  abroad  for  keeping 
the  public  money  will  be  helpful. 

In  England,  as  is  well  known,  the  money  of  the  gov- 
ernment is  kept  in  the  Bank  of  England.  "As  the 
banker  of  the  government  the  Bank  of  England  manages 
the  payment  of  dividends  on  the  national  debt,  the  issue 
and  withdrawal  of  exchequer  bills,  treasury  bonds,  the 
issue  of  all  government  loans,  and  the  banking  operations 
connected  with  the  Treasury,  the  government  offices  gen- 
erally, the  Indian  government,  and  a  large  portion  of 
the  monetary  business  of  the  colonial  governments."  * 

1  Palgrave's  "  Dictionary  of  Political  Economy." 

The  Bank  of  England  transacts  the  whole  business  of  government.  "  She 
acts  not  onlv,"  says  Adam  Smith,  "as  an  ordinary  bank,  but  as  a  great  engine 
of  state.     She  receives  and  pays  the  greater  part  of  the  annuities  which  are  due 


PROPOSALS  FOR  REPLACEMENT.  225 

As  the  public  money  is  received  from  taxes  it  is  paid 
in  on  behalf  of  the  government,  to  the  account  of  the 
exchequer,  at  the  Bank  of  England  or  of  Ireland.  No 
security  is  required  from  the  bank  for  these  deposits. 
The  government  is  on  the  same  footing  as  other  deposit- 
ors. Hence  there  is  no  disturbance  caused  in  the  money 
market  by  the  variations  in  the  volume  of  currency  due 
to  government  receipts  and  payments ;  for  the  money  in  the 
bank  is  practically  in  the  channels  of  business,  since 
it  is  within  each  of  the  demands  of  business. 

The  English  method  of  checking  a  panic  is  familiar. 
As  is  well  known,  the  paper  circulation  of  the  Bank  of 
England  is  limited  to  about  ,£15, 000,000,*  secured  by 
government  stock,  plus  as  much  more  as  the  bank  may 
choose  to  issue,  provided  only  it  has  Pound  for  Pound  of 
bullion  for  every  additional  note.  If  in  a  time  of  panic 
the  pressure  becomes  so  severe  as  nearly  to  drain  the  specie 
of  the  bank,  and  so  threatens  to  make  a  stoppage  of  dis- 
count necessary,  with  the  terrible  loss  that  such  a  stop- 
page would  involve,  the  Ministry  permits  the  bank  to 
issue  notes  in  excess  of  the  legal  limit.  This  course  was 
necessary  for  the  first  time  in  the  crisis  of  1847.  After 
the  resources  of  the  bank  were  exhausted,  the  government 
authorized  it  to  issue  at  discretion,  and  the  panic  was  im- 
mediately stayed.  The  excess  of  notes  issued  was  only 
,£400,000.  The  next  suspension  of  the  Bank  Act  was 
in  1857.  The  resources  of  the  bank  at  the  close  of 
business   on  "the    12th  of  November  of  that  year  were 

to  the  creditors  of  the  public ;  she  circulates  exchequer  bills  ;  and  she  advances 
to  the  government  the  usual  amount  of  the  land  and  malt  taxes,  which  are  fre- 
quently not  repaid  till  some  years  thereafter." — Encyc.  Britan.,  qth  ed.,  Art. 
Banks. 

1   £l4,47S>000- 


226  THE  INDEPENDENT   TREASURY. 

£68,085  ^n  n°tes,  £274>953  in  gold,  and  £41,106  in 
silver,  being  a  total  sum  of  £387, 144."  :  The  bankers' 
balances  alone  in  the  bank  were  £5,458,000.  On  the 
evening  of  the  12th  the  government  authorized  the  sus- 
pension of  the  Bank  Act,  but  fixed  10  per  cent,  as  a 
minimum  rate  of  discount.  Next  morning  the  panic 
passed  away.  £7,376,000  were  issued  in  excess  of  the 
statutory  limit.  The  issue  ran  through  November,  thus 
showing  that  the  commercial  pressure  was  prolonged  after 
the  panic  was  broken.  A  suspension  in  1S66  produced 
similar  quieting  effects. 

The  conditions  under  which  the  suspension  of  the  act 
of  1844  is  permitted  are  carefully  restricted.  All  profits 
from  the  extra  issue  of  notes  must  be  paid  to  the  govern- 
ment, and  the  minimum  rate  of  discount  must  be  kept  at 
10  per  cent.  But  although  the  Bank  of  England  "is  the 
chief  depository  of  a  government  which  maintains  no 
public  treasury;  [and  although]  it  is  charged  with  the 
duty  of  keeping  the  registry  of  the  public  debt,  and  of 
paying  the  interest  thereon ;  still  it  is  a  private  corporation 
of  the  familiar  type,  managed  by  its  own  officers,  in  whose 
selection  the  government  has  no  share,  and  whose  re- 
sponsibility is  to  their  own  stockholders  alone."2 

The  government  never  suffers  any  inconvenience  from 
delay  in  drawing  its  deposits;  its  drafts  are  always 
promptly  and  fully  met,  and  frequently  it  is  accommo- 
dated with  advances  from  the  bank  in  anticipation  of  rev- 
enue. The  English  system  has  furnished  for  England  the 
safety  and  promptness  of  payment  which  are  necessary  for 
the  public  money,  and  it  avoids  the  disturbance  of  the 
money  market  that  is  a  consequence  of  our  system.      Its 

1  MacLeod's  "  Theory  and  Practice  of  Banking,"  vol.  ii.,  p.  356,  4th  ed. 
'•*  Dunbar's  "Theory  and  History  of  Banking,''  p.  1S4. 


Proposals  for  replacement.  227 

provision  for  panics,  though  clumsy,  has  proved  effective. 
It  is  superior  to  our  Treasury  management  of  such  occur- 
rences, in  that  it  is  not  dependent  on  the  will  of  a  single 
man,  but  must  have  the  approval  both  of  the  officers  of  the 
bank  and  of  the  officials  of  the  government;  and  as  the 
officers  of  the  bank  are  in  close  touch  with  business  inter- 
ests they  are  better  able  to  judge  of  the  time  when  action 
is  necessary.  The  terms  on  which  discount  is  offered  are, 
by  the  conditions  of  the  suspension  of  the  Bank  Charter, 
prevented  from  being  too  easy,  and  the  bank  can  make 
them  as  much  more  difficult  than  the  government  mini- 
mum l  as  it  chooses,  because  the  law  does  not  fix  a  maxi- 
mum rate  of  discount.  Moreover,  the  expansion  of  the 
currency  is  temporary,  lasting  only  long  enough  to  restore 
confidence;  the  amount  of  expansion  depends  wholly  on 
the  demand,  is  caused  by  it,  and  contracts  with  it,  so  that 
expansion  beyond  the  need  of  the  time  is  not  possible, 
while  yet  it  can  be  made  as  great  as  the  demand ;  in  short, 
the  amount  of  expansion  and  the  demand  for  expansion 
vary  together,  and  the  policy  of  a  variable  rate  of  dis- 
count gives  the  bank  control  of  the  demand,  within  certain 
limits.  And  finally,  the  profit  from  the  transactions  for 
the  relief  of  a  panic  goes  to  the  public  Treasury,  whereas 
under"  our  system  the  sale  of  bonds  by  the  Secretary  of 
the  Treasury  is  susceptible  to  the  influence  of  speculators, 
and  makes  it  possible  for  them  to  gain  from  the  purchases 
of  bonds  by  the  government. 

In  France  we  find  a  different  system  still.  The  Bank 
of  France  is  an  "  institution  subject  to  the  control,  and 
mule  subservient  to  the  needs,  of  the  government  of  the 
day."  "     But  the  Treasury  keeps  a  running  account  at  the 

1  Ten  per  cent. 

2  Dunbar's  "  Theory  and  History  of  Banking,"  p.  no. 


228  THE   INDEPENDENT   TREASURY. 

bank,  which  is  regulated  by  the  same  principles  that 
govern  the  accounts  of  individuals,  and  the  Treasury  is 
allowed  by  law  to  borrow  from  the  bank  to  the  extent  of 
sixty  millions  of  francs.2  The  revenue  is  collected  by 
government  officers,  or  "  Tresorerie  Payeurs- Genera  I"  in 
the  different  departments.  The  money  received  is  first 
employed  to  pay  the  expenses  of  the  department,  and 
any  excess  is  forwarded  to  the  Treasury,  in  the  form  of 
prime  bank  paper  or  of  first-class  commercial  bills  of  ex- 
change having  not  more  than  thirty  days  to  run.  The 
payeurs-general  are  expected,  however,  to  maintain  de- 
posits proportionate  to  the  needs  of  their  work. 

When  the  local  resources  are  insufficient  to  pay  the 
expenses  of  a  department,  the  paymasters  general 
(payeurs-general)  can  either  make  payments  by  drafts  on 
the  Treasury  or  on  neighboring  departments,  or  by  open- 
ing credit  accounts  with  the  branches  of  the  Bank,  or, 
finally,  by  receiving  funds  from  Paris. 

The  payeurs-general  are  forbidden  to  engage  in  banking 
operations  except  in  movements  of  funds  which  result  in 
facilitating  the  service  of  the  Treasury. 

Although  the  Bank  of  France  is  used  by  the  govern- 
ment for  keeping  the  public  money,  it  is  not  a  fiscal 
agent  of  the  government,  like  the  Bank  of  England.  It 
does  not  collect  or  disburse  the  revenues  of  the  Treasury; 
but  it  lends  largely  to  the  government  in  times  of  need, 
and  its  credits  have  carried  the  government  through  many 
trying  exigencies. 

Although  this  system  must  affect  the  amount  of  money 
afloat  by  alternate  absorptions  and  disbursements,  it 
probably  does  so  to  a  less  extent  than  our  Sub-Treasury, 
because  the  deposit  of  government  balances  in  the  banks 

1  Block's  "  Dictionnaire  de  l'Administration.'' 


PROPOSALS  FOR  REPLACEMENT.  22() 

prevents  large  accumulations  in  the  treasury.  Moreover, 
small  variations  in  the  circulating  medium  are  of  less 
importance  in  France  than  in  England  or  the  United 
States,  because  business  is  done  to  a  much  less  extent  by 
credit.  Cash  transactions,  that  is,  bear  a  much  larger 
proportion  to  the  total  volume  of  business  than  is  the 
case  in  this  country  or  in  England.  There  is  no  regu- 
lar method  for  furnishing  government  assistance  to  the 
business  community  in  a  panic.  That  is  left  to  the 
banks,  except  in  very  extraordinary  cases  in  which  politi- 
cal causes  have  had  an  influence.  In  such  cases  the  gov- 
ernment has  given  a  legal  tender  character  to  the  notes 
of  the  Bank  of  France,  which  enjoys  a  monopoly  of  issue, 
by  decreeing  what  is  called  the  "cours  force.'''  But  ordi- 
narily, with  the  policy  of  a  variable  rate  of  discount,  the 
banks  have  been  able  to  control  crises. 

Like  the  Bank  of  England,  the  Reichsbank  of  Ger- 
many is  in  its  organization  a  private  institution;  that  is, 
its  stock  is  owned  by  private  individuals.  But  the  gov- 
ernment has  a  power  of  control  over  it,  and  appoints  the 
board  of  directors,  and  shares  in  its  profits.  The  bank 
is  "required  to  receive  and  make  payments,  and  to  con- 
duct other  financial  operations  for  the  Imperial  Treas- 
ury without  compensation,  and  also  to  manage  free  of  cost 
the  receipts  and  payments  of  the  several  states  of  the 
Empire."1  The  German  bank  law  is  modelled  largely  on 
the  English.  Its  tendency  is  ultimately  to  concentrate 
in  the  Reichsbank  the  whole  power  of  issuing  notes. 
Meantime,  that  bank  is  allowed  to  issue  its  apportionment, 
which  at  present  amounts  to  286,585,ooo2  marks,  not 
secured  by  cash  in  hand.      If  any  notes  are  issued  above 

1  Dunbar's  "  Theory  and  History  of  Banking,''  p.  190. 

2  Ibid.,  p.  192. 


230  THE   INDEPENDENT  TREASURY. 

the  amount  which  the  bank  is  allowed  by  law  to  put  out 
without  special  security,  they  must  be  secured  by  specie, 
treasury  notes,  or  the  notes  of  other  banks.  Unless  the 
surplus  notes  are  thus  secured,  a  tax  of  five  per  cent,  is 
by  law  imposed  on  them.  It  is  by  taking  advantage  of 
this  law  that  provision  is  made  for  an  expansion  of  the 
currency  on  occasion  of  a  severe  monetary  stringency  or 
a  panic.  The  tax  of  five  per  cent,  is  so  high  as  to  make 
extra  issues  unprofitable  except  at  a  time  when  the 
demand  for  money  is  so  great  as  to  cause  severe  pressure 
in  the  market.  Hence  the  extra  notes  issued  under 
these  conditions  are  quickly  retired  when  the  money 
market  resumes  its  normal  condition. 

In  Germany  every  bank  of  issue  is  required,  like  our 
national  banks,  to  receive  the  notes  of  its  sister  institu- 
tions at  par;  but  it  cannot  pay  them  out  again,  unless 
they  are  notes  of  the  Reichsbank,  except  for  redemption 
or  in  payments  to  the  bank  that  issued  them.  The  bank 
notes  are  not  legal  tender,  and  are  not  received  for  pub- 
lic dues  except  under  conditions  which  the  government 
may  withdraw  at  any  time.  Every  bank  must  redeem  its 
notes  on  presentation  at  its  own  counter,  and  also  at  an 
agency  in  either  Berlin  or  Frankfort. 

In  Germany  we  find,  then,  that  the  money  raised  by 
taxation  is  not  withdrawn  from  the  channels  of  business, 
but  is  at  all  times  accessible  by  being  deposited  in  the 
Reichsbank  and  its  branches. 

In  Germany,  too,  as  in  England,  provision  is  made  for 
panics  by  an  expansion  of  the  bank-note  issue.  The 
German  provision  is,  however,  much  more  satisfactory 
than  the  English,  because  its  machinery  is  set  in  motion 
more  automatically.  When  the  demand  for  money  raises 
discount  rates  high  enough,   under  the  German  system 


PROPOSALS  FOR  REPLACEMENT.  23  I 

the  extra  supply  comes  forth  of  itself  in  the  natural  and 
ordinary  course  of  business.  It  is  not  necessary,  as  it  is 
in  London,  to  wait  for  the  decision  of  men  even  so  expe- 
rienced as  the  bank  directors  that  the  time  has  come  for 
a  suspension  of  the  Bank  Act.  The  extra  issue  is  not  in 
Germ  my  dependent  on  the  judgment  of  any  man  or  set 
of  men  as  to  its  necessity.  The  exhaustion  of  the  ordi- 
nary supply  of  money,  and  the  readiness  of  borrowers  to 
pay  a  sufficiently  high  rate  of  interest  for  loans,  is  at  once 
the  evidence  of  the  necessity  for  expansion  and  the  power 
that  induces  it.  The  extra  supply  cannot  come  without 
the  strong  demand;  and  the  demand  cannot  exist,  under 
the  laws  of  trade,  without  bringing  a  sufficient  supply. 
The  movement  is  thus  automatic.  The  only  part  of  the 
whole  plan  which  depends  on  the  judgment  of  those  who 
work  it,  is  in  the  fixing  of  the  rate  of  the  tax  on  extra  is- 
sues. If  this  were  put  too  high  a  monetary  stringency 
might  have  to  become  exceedingly  severe  before  the  bank 
could  issue  notes  over  its  legal  limit  without  loss.  But 
there  is  very  little  room  for  error  here,  and  five  per  cent, 
per  annum  is  a  sufficiently  low  rate. 

It  is  not  necessary  to  describe  the  system  of  financial 
administration  of  still  other  countries.  Italy  and  Russia 
have  national  banks  in  which  the  money  of  the  govern- 
ment is  kept,  and  which  aid  the  government  in  its  finan- 
cial operations. 

Although  our  own  government  formally  separated  it- 
self from  banks  and  banking  by  the  establishment  of 
the  Independent  Treasury  system,  it  was  in  a  few  years 
driven  by  the  course  of  events  into  a  renewal  of  intimate 
relations  with  them.  The  exigencies  of  the  Civil  War 
compelled  the  government,  as  we  have  seen,  to  resort  to 
the  banks  for  support;  and  the  connection  then  re-estab- 


232  THE  INDEPENDENT  TREASURY. 

lished  has  become  more  extensive  and  closer  as  the  coun- 
try has  developed  and  the  financial  operations  of  the 
government  have  assumed  a  larger  scale.  In  the  fiscal 
year  1891  the  number  of  national  banks  which  held  public 
money  on  deposit  was  213,  but  the  policy  of  the  present 
administration  has  been  to  reduce  the  number.  For 
the  past  thirty  years,  then,  the  country  has  maintained  a 
bank  connection  alongside  of  the  Sub-Treasury  system. 
It  is  desirable,  in  order  to  obviate  the  evils  of  the  Inde- 
pendent Treasury,  that  this  use  of  banks  be  enlarged  so 
as  practically  to  supplant  the  Sub-Treasury  entirely.  The 
advantages  that  would  result  from  doing  so  are  very  great. 
The  depository  banks  would  furnish  a  ramified  system  of 
receiving  and  disbursing  points  for  money  due  to  and 
from  the  government,  and  thus  would  be  a  great  conven- 
ience to  the  government,  to  those  who  have  taxes  or  other 
public  dues  to  pay,  to  the  public  creditors,  and  to  dis- 
bursing officers.  Even  now,  without  the  banks  the  fric- 
tion and  difficulty  that  would  occur  in  these  transactions 
would  be  intolerable;  and  no  equivalent  system  of  in- 
dependent depositories  could  be  established  and  main- 
tained except  at  a  cost  to  the  government  altogether  in 
excess  of  the  benefits  it  would  bring.  The  banks  per- 
form these  duties  cheaply  because  they  are  in  the  line, 
so  to  speak,  of  regular  banking  business  If  complete 
independence  of  the  banks  were  insisted  on  by  the  gov- 
ernment now,  every  patent-office  fee,  every  internal 
revenue  tax,  in  short,  every  sum  due  the  government, 
would  have  to  be  remitted  in  money  to  a  sub-treasury, 
or  depository,   perhaps  some  hundreds  of  miles  away. 

Besides  the  great  inconvenience  that  would  ensue  from 
the  use  of  independent  depositories  only,  there  might 
possibly  result    in   many   places   a    disturbance  in    the 


PROPOSALS  FOR  REPLACEMENT.  233 

local  distribution  of  money  which  would  be  very  in- 
jurious. 

The  use  of  banks  as  many  local  centres  of  govern- 
ment financial  management  obviates  all  these  disadvan- 
tages; and  they  furnish  collecting  and  disbursing  officers 
with  safe  and  convenient  places  to  keep  their  money. 

Finally,  and  most  important,  the  use  of  the  banks  as 
sole  government  depositories  would  do  away  with  those 
inequalities  of  strain  in  the  money  market  which  the 
Independent  Treasury  sometimes  causes.  Money,  the 
great  tool  of  exchange,  and  the  main  direct  basis  of 
credit  operations,  would  be  left  available  more  fully 
than  now,  so  far  as  the  operations  of  the  government  are 
concerned;  and  the  friction  caused  by  its  arbitrary 
absorptions  and  disbursements  would  be  avoided. 

There  is  nothing  new  in  the  proposal  to  use  banks 
for  the  deposit  of  the  public  money.  As  has  just  been 
pointed  out,  the  country  has  been  gradually  drifting  to  the 
policy,  and  it  has  been  advocated  strongly  by  men  of 
various  shades  of  political  opinion,  as  well  students  of 
finance  as  men  in  practical  life.1 

It  is  both  fortunate  and  unfortunate  that  any  proposal  to 
use  the  banks  of  the  country  more  largely  for  government 
purposes  arouses  suspicion  among  a  large  number  of  our 
people,  and  recalls  to.  them  memories  of  the  unfortunate 
experiences  of  the  government  with  the  banks  as  they 
were  forty,  fifty,  or  sixty  years  ago.  It  is  fortunate 
because  it  insures  a  careful  scrutiny  of  any  method  pro- 
posed for  the  revival  of  the  connection  between  the 
Treasury  and  the  banks,  and  so  will  prevent  hasty 
action ;  it  is  unfortunate,  however,  in  the  intensity  of 
suspicion  and  opposition  which  it  arouses,  because  there 

1  See  pp.  96-98,  and  also  various  Finance  Reports. 


234  THE  INDEPENDENT  TREASURY. 

is  danger  that  proposals  for  reform  in  this  direction  will 
meet  but  scant  favor.  The  feeling  of  opposition  is 
increased  by  the  recollection  of  the  political  issues  that 
arose  out  of  the  connection  between  the  government 
and  the  Second  Bank  of  the  United  States,  and  the  fear 
on  the  part  of  many  that  the  banks  might,  if  they  ac- 
quired any  relations  with  the  government,  obtain  politi- 
cal power,  to  the  detriment  of  the  interests  of  the  people. 

But  if  any  one  thing  in  connection  with  this  matter 
has  been  settled  by  the  drift  of  our  past  experience,  it  is 
the  impossibility  of  the  acquirement  of  political  influence 
by  the  banks,  as  at  present  organized,  from  their  mere 
relation  as  government  depositories.  Of  course  a  single 
national  bank,  like  the  old  United  States  Bank,  or  the 
national  banks  of  England  and  Germany,  is  not  contem- 
plated. Such  an  organization  is  impossible  in  the  United 
States  now.  We  must  discuss  our  banks  as  they  are; 
and  they  could  not  become  a  part  of  politics  under  exist- 
ing conditions.  For,  as  we  have  already  observed,  the 
tone  of  the  banking  community  is  far  higher  than  it  was; 
the  spirit  of  our  people  is  so  hostile  to  corporate  power  that 
collusion  between  the  banks  and  the  party  in  power  would 
not  be  tolerated;  the  banks  are  too  numerous  to  admit  of 
a  monopoly  of  government  patronage,  even  if  such  a 
monopoly  were  lawful,  as  it  is  not;  their  large  number 
would  induce  a  rivalry  that  would  prevent  favoritism; 
and,  finally,  and  strongest  reason  of  all,  there  would  be 
no  temptation  for  any  single  bank  to  enter  politics,  even 
if  it  could,  for  it  would  have  nothing  to  gain  by  so  doing, 
and  a  combination  of  banks  for  that  purpose  would  be 
utterly  impracticable. 

One  argument  that  has  been  advanced  on  political 
grounds  against  the  use  of  the  banks,  is  that  as  it  would 


PROPOSALS  FOR  REPLACEMENT.  235 

be  to  their  interest  that  the  government  should  have 
large  surpluses  to  deposit,  they  would  use  their  influence 
to  keep  up  taxation,  and  that  they  would  therefore  favor 
"protected  "  interests.  There  are  conceivable  conditions 
under  which  such  a  course  would  be  possible,  but  they  do 
not  exist  in  this  country.  If  there  were  but  one  govern- 
ment bank,  so  strong  that  it  could  coerce  the  government 
or  have  a  weighty  influence  in  national  legislation,  the 
result  mentioned  might  occur.  But  such  is  not  the 
case  with  us,  and  our  public  opinion  is  too  jealous  of 
banking  corporations  to  make  it  safe  for  the  banks  to 
try  it. 

The  political  issue  finds  no  room  for  consideration, 
then.  The  question  of  the  reorganization  of  the  financial 
system  of  the  government  is  not,  and  need  not  be,  a 
party  question  at  all;  for  no  changes  that,  under  existing 
conditions,  would,  or  could,  be  made,  could  endanger  in 
the  slightest  degree  the  integrity  of  our  political  institu- 
tions, or  interfere  with  the  prerogatives  of  any  branch  of 
our  government. 

Nor,  on  the  other  hand,  need  we  fear  that,  the  existing 
executive  at  any  time  could  show  favoritism  towards  one 
or  more  banks  at  the  expense  of  the  others,  as  some 
charged  President  Jackson  and  his  Administration  with 
doing.  For  some  simple  legislative  provision,  as,  for  ex- 
ample, giving  all  the  national  banks  the  right  to  bid 
for  public  deposits,  would  do  away  with  any  possibility  of 
"pet  banks." 

In  order  to  understand  clearly  the  points  at  which  im- 
provements in  the  connection  of  the  government  with 
the  banks  could  be  made  so  as  to  get  rid  of  some  of  the 
evils  of  the  Sub-Treasury  system,  it  is  desirable  to  exam- 
ine the  conditions  of  that  connection  as  it  exists  at  present. 


236  THE  INDEPENDENT  TREASURY. 

It  was  provided  by  the  law1  establishing  the  National 
Banking  system,  that  all  national  banks  designated  by 
the  Secretary  of  the  Treasury  for  the  purpose  should  be 
depositories  of  public  money,  except  receipts  from  cus- 
toms. They  may  also  be  employed  as  financial  agents 
of  the  government,  and  are  required  to  give  satisfactory 
security,  by  the  deposit  of  government  bonds  "and  other- 
wise," for  the  safe-keeping  of  the  public  deposits  and  the 
faithful  performance  of  their  duties  as  government  agents. 
They  are  also  required  by  this  law  to  receive  the  notes 
of  all  other  national  banks  at  par.  Any  banker  or  broker 
not  an  authorized  depository,  is  liable  to  prosecution  for 
embezzlement,  if  he  receives  or  in  any  way  deals  in  the 
public  money.  The  public  depositories  are  further  re- 
quired to  forward  all  mutilated  and  worn  notes  to  the 
Comptroller  of  the  Currency  for  redemption,  and  to  assort 
and  forward  the  notes  of  banks  that  reduce  or  withdraw 
their  circulation.  The  notes  of  the  national  banks  are 
not  received  by  the  government  for  duties  on  imports, 
and  are  not  paid  out  by  it  for  interest  on  the  public  debt. 
The  security  required  for  deposits  by  the  government  is 
within  the  discretion  of  the  Secretary  of  the  Treasury. 
The  bonds  hitherto  required  as  security  have  been  bonds 
of  the  United  States,  or  bonds  guaranteed  by  the  United 
States,  such  as  the  "Pacific  currency  sixes"  or  the  "3.65 
bonds"  of  the  District  of  Columbia.  The  Secretary 
could  legally  accept  other  security  than  United  States 
bonds  if  he  chose,  but  the  custom  thus  far  has  been  not  to 
do  so.  The  amount  of  bonds  required  to  be  deposited  as 
security  is  such  as  the| Secretary  of  the  Treasury  may  deem 
proper,  but  must  be  at  least  $50,000.  The  depositories 
are  required  to  make   daily  returns  of  their  receipts  of 

1  See  Appendix,  II,  H. 


PROPOSALS  FOR  REPLACEMENT.  237 

public  money  to  the  Treasury  Department,  and  if  at  any 
time  these  receipts  exceed  the  amount  of  bonds  deposited 
by  the  bank  as  security,  additional  bonds  must  be  pro- 
vided immediately,  or  the  surplus  of  deposits  over  security 
must  be  given  up. 

The  amount  of  deposit  allowed  on  bonds  has  varied 
under  different  Secretaries  of  the  Treasury.  Until  about 
1885,  or  1886,  but  few  depository  banks  were  allowed 
fixed  balances,  because  the  practice  was  for  the  Treasurer 
to  draw  upon  his  balance  whenever  he  needed  funds.  At 
about  the  time  mentioned,  however,  the  practice  became 
general  to  allow  a  fixed  balance  equal  to  ninety  per  cent, 
of  the  United  States  four  per  cent,  bonds,  and  a  somewhat 
smaller  amount  on  the  three  per  cents,  and  four  and  a  half 
per  cents.  Later  the  depository  banks  were  allowed  to 
hold  public  money  up  to  the  par  value  of  the  bonds  de- 
posited as  security,  and  in  some  cases  even  above  the  par 
value.1 

It  is  clear  from  the  conditions  on  which  the  depository 
banks  are  allowed  to  hold  the  public  money,  that  ultimate 
loss  is  altogether  out  of  the  question  so  long  as  the  con- 
ditions are  observed.  The  element  of  safety  is  abun- 
dantly provided  for,  because,  even  if  any  bank  should 
fail  to  pay  the  deposits  left  with  it,  the  bonds  held  by  the 
government  as  security  could  be  cancelled  or  sold.  Sale 
would  be  necessary  to  prevent  loss  if  the  deposits  allowed 
exceeded  the  par  value  of  the  bonds  held.  And  there 
would  be  a  possibility  of  some  loss  if  between  the  time 
of  deposit  and  the  failure  to  repay  there  occurred  a  fall  in 
the  market  price  of  bonds  on  which  deposits  were  allowed 
above  par.     But  such  a  loss  could  not  be  experienced 

1  See  above,  pp.  S6-87. 


238  THE  INDEPENDENT  TREASURY. 

except  by  the  gross  negligence  or  mismanagement  of 
government  officers. 

The  present  provisions  for  insuring  the  safety  of  the 
public  deposits  are  in  marked  contrast  to  those  which 
obtained  under  the  bank  deposit  system  of  1836-1846. 
By  the  articles  of  agreement  with  the  banks  then,  security 
was  taken  for  government  deposits  only  if  they  exceeded 
one-half  the  capital  of  the  bank,  or  if  the  Secretary  of  the 
Treasury  deemed  it  at  other  times  necessary. 

Still  other  guaranties  of  safety  for  the  public  deposits 
are  that  the  number  of  depositories  is  larger  now  than  it 
was  in  1846,  and  that  the  banks  are  stronger  and  have 
larger  capital. 

But  although  ultimate  loss  is  thus  abundantly  guarded 
against,  there  are  other  objections  that  have  been  made 
to  the  use  of  depository  banks,  which  deserve  considera- 
tion. These  objections  were  summarized  by  Secretary 
Windom  in  his  reports  for  1889  and  1S90,  in  justify- 
ing his  reversal  of  the  policy  of  his  predecessor,  who  had 
made  large  use  of  the  banks  for  depositing  the  public 
money  in  order  to  prevent  contraction  of  the  currency. 
The  objections  as  stated  by  Mr.  Windom  are  as  follows: 
"The  national  bank  depositories  have  been,  and  are, 
useful  auxiliaries  to  the  Sub-Treasury  system,  but  the 
deposit  of  public  funds  therewith  to  an  amount  largely  in 
excess  of  the  needs  of  the  public  service  is  wholly  un- 
justifiable. Such  a  policy  is  contrary  to  the  spirit  of  the 
act  of  August  6,  1846,  which  contemplates  a  Sub-Treasury 
independent  of  the  banks. 

"  It  necessarily  involves  temptation  to  favoritism  of  the 
most  objectionable  character. 

"  It  makes  the  Treasury  more  or  less  dependent  on  the 
banks,  on  account  of  the  difficult  and  delicate  task  of 


PROPOSALS  FOR  REPLACEMENT.  239 

withdrawing  the  deposits  when  wanted,  without  creating 
serious  disturbance  of  financial  conditions. 

"  It  involves  the  exercise  of  a  most  dangerous  power  by 
the  Secretary,  whereby  he  may,  if  so  disposed,  expand  or 
contract  the  currency  at  will,  and  in  the  interest  of  cer- 
tain favorites  whom  he  may  select. 

'"It  is  grossly  unjust  to  the  government  to  grant  the 
free  use  of  its  money,  while  it  pays  to  the  very  parties 
thus  favored  four,  and  four  and  a  half  per  cent  interest 
on  its  own  bonds,  which  are  pledged  as  security  for  the 
money  thus  received. 

"...  It  is  manifestly  unfair  to  the  people  to  give  the 
banks  the  use  of  their  money,  while  they  are  required 
by  the  banks  to  pay  from  six  to  eight  per  cent  interest 
on  it. 

"Bad  as  these  features  of  such  a  policy  are,  a  more 
serious  objection  is  found  in  the  difficulty  and  danger 
encountered  in  the  withdrawal  of  such  excessive  deposits. 
Money  thus  deposited  goes  at  once  into  the  channels  of 
trade,  and  business  is  adjusted  to  the  increased  supply. 

"  A  sudden  or  injudicious  withdrawal  would  be  felt  far 
more  seriously  by  the  large  class  of  business  borrowers 
than  by  the  banks.  The  latter  are  money-lenders,  and 
a  stringency  may  only  increase  their  rates  and  add  to 
their  profits;  while  the  former,  having  based  their  busi- 
ness ventures  upon  the  accommodations  offered  by  the 
banks,  may  be  utterly  ruined  when  such  accommodations 
are  suddenly  withdrawn."  l 

In  his  report  for  1890  Secretary  Windom  advanced 
the  further  objection  to  depositing  the  public  money  in 
banks,  that  such  deposits  afford  no  relief  for  a  sudden 
emergency. 

1  Finance  Report.  1889,  p.  lxxxviii. 


24O  THE   INDEPENDENT    TREASURY. 

We  will  discuss  first  those  of  Mr.  Windom's  objections 
which  are  either  without  good  foundation,  or  can  be  easily 
met  by  changes  in  the  law.  His  first  objection  to  the 
use  of  banks  by  the  government,  that  their  employment  is 
contrary  to  the  spirit  of  the  Independent  Treasury  law, 
is,  undoubtedly,  in  a  measure  correct;  and  Mr.  Windom 
is  to  be  praised  for  his  conscientious  adherence  to  what 
he  conceived  to  be  the  spirit  of  the  law.  An  extension 
of  such  conscientiousness  would  redound  to  the  good  of 
the  public  service.  But  the  act  of  August  6,  1846,  had 
been  partly  superseded  by  a  section  of  the  national  bank 
law,  and  the  new  law  had  been  followed  in  some  shape  for 
many  years.  It  is  difficult  to  see  why  greater  importance 
should  be  attached  by  the  Secretary  to  the  one  law  than 
to  the  other. 

Moreover,  an  extension  among  public  officers  of  the 
habit  of  interpreting  the  laws  they  are  called  on  to  ad- 
minister, in  a  way  which  they  conceive  to  be  the  spirit  of 
the  law,  would  be  an  assumption  of  a  dangerous  prero- 
gative, if  the  course  of  action  which  these  officers  declare 
to  be  contrary  to  the  spirit  of  the  law  is  really  permitted 
by  its  wording.  It  is  to  be  presumed  that  the  legislature 
expresses  its  will  plainly  and  intelligibly.  If  it  does 
not,  then,  indeed,  the  administrators  of  the  law  must 
enforce  it  as  they  understand  it,  subject  to  the  interpre- 
tation of  the  courts. 

Finally,  whatever  force  may  lie  in  this  objection  of 
Mr.  Windom's  to  the  use  of  national  bank  depositories 
under  present  regulations  could,  of  course,  be  made  to 
disappear  by  the  enactment  of  a  new  law. 

The  objection  that  the  use  of  the  banks  as  depositories 
involves  temptation  to  favoritism  is  hardly  worth  consid- 
ering, in  view  of  the  fact  that  the  temptation  has  been 


PROPOSALS  FOR  REPLACEMENT.  24I 

so  successfully  resisted  in  the  past.  That  the  use  of  the 
banks,  as  the  banks  have  been  used  in  recent  years,  has 
actually  involved  favoritism,  there  is  no  proof  worthy  of 
consideration ;  but  even  if  there  were,  the  fact  would  be 
an  objection  to  the  existing  conditions  of  the  employment 
of  the  banks,  and  not  to  the  employment  itself.  And,  as 
was  previously  pointed  out,  this  difficulty  could  be  easily 
overcome  by  some  simple  provision  of  law  requiring  pub- 
lic competition  for  deposits. 

It  is  true,  as  Mr.  Windom  says,  that  the  use  of  the  banks 
gives  the  Secretary  of  the  Treasury  power  to  contract  or 
expand  the  currency  at  will,  within  limits,  and  that  such 
a  power  in  the  hands  of  an  incompetent  or  partisan  Sec- 
retary is  a  source  of  danger  to  the  business  interests  of 
the  country.  But  he  has  just  as  much  power  and  oppor- 
tunity to  do  this  mischief  through  the  purchase  of  bonds 
with  a  surplus,  as  by  depositing  it  in  the  banks.  The 
injudicious  course  of  Secretary  Boutwell  in  1872  and  1873 
is  a  case  in  point.  He  unwittingly  played  into  the  hands 
of  speculators,  and  by  his  ill-advised  disbursements  of 
surplus  money  he  probably  disturbed  the  market  at  least 
as  much  as  he  could  have  done  by  any  misuse  of  the 
bank  depositories.  We  have  seen  abundant  proof,  in  the 
course  of  our  investigations,  that  lack  of  judiciousness  on 
the  part  of  the  Secretary  of  the  Treasury  has  many  times 
proved  mischievous  in  periods  of  financial  stringency. 
The  ^.Secretary,  then,  certainly  has  as  much  power  for 
mischief  under  the  Independent  Treasury  system  as  he 
would  have  under  a  system  requiring  the  deposit  of  the 
public  money  in  banks.  Whether  he  would  have  more 
inclination  to  misuse  his  powers  under  the  one  system 
than  under  the  other  need  not  be  discussed;  for  no  reason 
appears  why  he  should.     Moreover,  it  would  be  possible, 


242  THE  INDEPENDENT  TREASURY. 

under  the  system  of  using  the  banks  as  depositories,  to 
take  away  any  power  the  Secretary  may  now  have  of 
arbitrarily  affecting  the  volume  of  circulating  medium, 
by  requiring  the  public  money  to  be  deposited  in  banks 
when,  for  example,  it  exceeded  a  certain  sum,  and 
making  the  opportunity  of  securing  part  of  the  deposits 
open  to  all  national  banks  that  would  meet  the  require- 
ments of  the  law.  Under  the  sub-treasury  system  this 
power  cannot  be  taken  from  the  Secretary,  so  long  at 
least  as  there  is  a  surplus  of  receipts  over  expenditures. 
This  objection  of  Mr.  Windom's  to  the  use  of  banks  has, 
then,  like  the  others  thus  far  considered,  no  force  what- 
ever of  importance. 

There  is  reason,  however,  in  the  objection  that  it  is 
unjust  to  give  the  banks  the  free  use  of  public  money. 
Such  a  use  the  banks  have  no  right  to,  and  do  not,  as  a 
matter  of  fact,  ask  for.  All  that  they  have  any  right  to 
is  a  reasonable  remuneration  for  any  extra  trouble  and 
expense  to  which  they  may  be  put  by  being  compelled 
to  perform  the  duties  of  government  depositories.  They 
should  be  paid  for  services  to  the  government  as  they  are 
paid  for  services  to  private  persons.  The  return  they 
receive  for  performing  duties  of  depositories  or  fiscal 
agents  may  or  may  not  be  the  mere  right  to  a  franchise ; 
that  is  a  question  of  detail  to  be  determined  by  circum- 
stances. On  the  other  hand,  banking  corporations  are 
entitled  to  no  favors  from  the  government.  If  rightly 
managed  they  need  none  and  will  ask  for  none ;  and  both 
equity  and  the  spirit  of  our  people  demand  that  they 
should  pay  for  whatever  privileges  they  may  be  permitted 
to  enjoy.  But  the  conditions  on  which  the  public  money 
shall  be  deposited  in  the  banks  is  a  matter  of  detail  that 
can  be  very  easily  so  adjusted  as  to  prevent  the  banks 
from  securing  an  undue  advantage  therefrom. 


PROPOSALS  FOR  REPLACEMEXT.  243 

When  we  come  to  the  consideration  of  the  matter  of 
prompt  payment  of  government  drafts  by  the  banks,  we 
meet  with  the  first  serious  difficulty  that  Mr.  Windom 
brought  up  in  his  criticism  of  the  bank  deposit  system. 
''The  difficulty  which  the  Department  has  encountered 
during  the  past  year  in  withdrawing  a  part  of  our  pres- 
ent bank  deposits,  even  by  the  careful  and  conservative 
methods  adopted,  and  at  times  when  there  was  no  finan- 
cial pressure,  gives  some  conception  of  what  those  dif- 
ficulties would  be  in  making  such  withdrawals  in  time 
of  stringency  and  commercial  distress.  The  experiences 
of  1837  would  be  repeated,  more  or  less,  in  every  com- 
mercial crisis.''  *  Secretary  Windom  gives  no  details  of 
the  difficulty  to  which  he  alludes  here,  but  the  remark 
undoubtedly  points  to  some  delay  in  honoring  drafts, 
due  to  the  difficulty  experienced  by  some  depositories  in 
calling  in  their  loans  to  meet  the  drafts  without  disturb- 
ing the  money  market.  It  is  very  possible  that  a  bank, 
however  safe,  and  however  conservatively  managed,  might 
experience  some  embarrassment  in  meeting  a  sudden  and 
unexpected  draft,  if  the  government  were  one  of  its  largest 
depositors,  and  if  the  government  deposits  bore  an  undue 
proportion  to  the  total  deposits.  And  that  the  failure  of 
a  depository  bank  to  respond  promptly  to  a  Treasury 
draft  might  cause  difficulty  to  the  government  is  unde- 
niable, and  renders  necessary  some  assurance  of  the 
certainty  of  prompt  payment.  "  It  has  chanced  that, 
singly,  national  bank  depositories  have  failed  to  meet 
the  drafts  of  the  government  upon  them,  to  its  embarrass- 
ment. Greatly  more  so  would  it  be  if  all  or  many  should 
so  fail  together,  and  together  should  have  in  keeping,  in 
main,  the  assets  of  the  government."  2 

1  Windom,   Report,  1S90,  p.  xliv. 

2  Secretary  C.  J.  Folger,  Report,  i8i!r*. 


244  THE  INDEPENDENT  TREASURY. 

The  withdrawal  of  public  deposits  from  the  banks  is 
likely,  too,  to  have  a  disturbing  effect  on  the  money  mar- 
ket. On  the  22d  of  November,  1889,  there  was  a  ru- 
mor on  Wall  Street  that  Secretary  Windom  intended  to 
withdraw  the  government  deposits  from  those  banks  which 
had  charged  rates  for  money  higher  than  the  legal  rate  of 
six  per  cent.  In  consequence  of  the  rumor,  and  of  the 
anticipated  difficulty  of  getting  money,  call  loans  rose  to 
twenty  per  cent. l 

The  difficulty  of  withdrawal  would  be  much  increased  by 
the  occurrence  of  a  crisis.  Even  with  the  more  conserv- 
ative banking  methods  which  obtain  to-day,  there  would 
be  some  ground  for  fearing  a  recurrence  of  the  experi- 
ence of  1857.  In  that  year  "the  effort  of  the  government 
to  withdraw  its  deposits  and  get  control  of  its  funds  was 
felt  as  an  additional  blow  aimed  at  the  banks.  Every 
dollar  which  could  thus  be  drawn  from  the  vaults  of  the 
banks  diminished  to  that  extent  their  ability  to  afford 
relief  to  their  customers.  Their  loans  had  to  be  con- 
tracted, and  the  demand  made  by  them  upon  their  debt- 
ors for  settlement  increased  the  pressure  already  felt  in 
the  money  market,  and  thereby  added  to  the  general  panic 
and  want  of  confidence  which  are  the  usual  attendants  of 
a  monetary  crisis."  2 

It  is  undeniable  that  the  government  is  in  greater  dan- 
ger of  embarrassment  in  meeting  its  obligations  promptly 
if  its  money  is  in  the  banks,  than  if  the  money  is  in  its 
own  keeping.  The  provision  for  prompt  payment  is  the 
very  difficulty  to  be  overcome  in  the  use  of  the  banks, 
and  to  say  that  the  bank  deposit  system  might  cause  em- 
barrassment by  lack  of  promptness   is,   therefore,  only  to 

1  Commercial  and  Financial  Chronicle. 
-  Finance  Report,  1857,  p.  20. 


PROPOSALS  FOR  REPLACEMENT.  245 

state  the  problem  to  be  solved;  and  in  view  of  the  possi- 
bility of  danger,  the  advocates  of  the  use  of  banks  must 
propose  some  means  that  will  insure  promptness  in  hon- 
oring drafts.  For  we  cannot  surrender  the  certainty  of 
promptness  in  payment,  much  less  safety  to  the  public 
money,  for  the  sake  of  less  friction  in  the  money  market. 
Here,  then,  is  the  root  of  the  difficulty, —  to  avoid  arbi- 
trary variations  in  the  amount  of  money  afloat,  through 
the  operations  of  the  government,  while  yet  securing 
the  safety  of  the  public  money  and  its  prompt  payment 
on  demand ;  in  other  words,  to  retain  safety  and  secure 
elasticity. 

It  is  to  be  noted,  however,  that  the  difficulty  of  insur- 
ing prompt  withdrawals  of  public  deposits  without  greatly 
disturbing  the  money  market  is  due  largely  to  the  Inde- 
pendent Treasury  itself.  It  is  well  known  that  the  money 
taken  out  of  the  banks,  or,  what  is  the  same  thing,  from 
the  channels  of  business,  is,  under  our  Sub-Treasury 
system,  likely  to  be  locked  up  for  a  time  in  the  govern- 
ment vaults.  Especially  is  this  true  when  the  revenues 
of  the  government  are  greater  than  its  expenses.  This 
fear  of  a  contraction  of  the  currency  is,  in  part  at  least, 
the  cause  of  the  disturbance  which  sends  the  rate  of 
discount  up,  as  happened  on  the  occasion  we  have  men- 
tioned, November,  18S9.1  This  difficulty  would  be  at 
least  less  likely  to  occur,  and  the  disturbance  would  be 
much  less,  if  it  were  certain  that  the  draft  on  the  banks 
were  simply  to  be  a  transfer  of  money  from  one  part  of 
the  business  community  to  another,  as  would  be  the  case 
if  the  government  immediately  paid  out  the  money  which 
it  withdrew.  Hence  the  objection  that  the  use  of  banks 
causes  disturbance  of  the  money  market  when  drafts  are 

l  See  above,  p.  244. 


246  THE  INDEPENDENT  TREASURY. 

made  on  the  deposits  they  hold,  militates,  like  most 
of  the  others  considered,  not  so  much  against  the  use  of 
banks  as  depositories,  as  against  the  present  method 
of  using  them,  or  against  some  of  the  conditions  under 
which  they  are  used. 

Still  another  real  difficulty  in  the  use  of  the  banks  as  the 
only  public  depositories,  is  that  of  providing  against  strin- 
gencies, crises,  and  panics.  A  reserve  is  needed  some- 
where, as  has  been  said,  and,  in  the  opinion  of  many, 
the  government  might  just  as  well  keep  it  as  the  banks. 
"A  heavy  surplus  in  the  Treasury  is  the  best  backbone 
the  banks  can  have;  commerce  demands  a  strong  reservoir 
which  the  banks  are  not  always  able  to  supply;  it  gives 
confidence  in  panics,  and  relief  in  times  of  stringency;  a 
depleted  Treasury  would  mean  over-strained  banks."  1  It 
has  been  correctly  argued  by  some  that  the  placing  of  the 
government  deposits  in  the  banks  would  not  prevent  the 
occurrence  of  monetary  stringencies,  and  would  not  fur- 
nish a  remedy  for  them  when  they  did  occur.  For  the 
banks  would  lend  the  deposits,  and  no  reserve  would  be  left 
in  this  case,  any  more  than  there  is  in  the  banks  when  a 
crisis  occurs  under  present  circumstances.  Of  course,  the 
most  obvious  reply  to  this  criticism  is  that  if  the  banks 
are  well  managed  they  will  always  be  prepared  for  a  cri- 
sis. But  the  fact  remains  that  some  banks  are  not  always 
well  managed,  and  there  is  no  reason  to  think  that  if  the 
public  money  were  all  intrusted  to  them,  they  would  re- 
gard themselves  as  any  more  responsible  than  they  do  now 
for  making  the  preparations  necessary  to  meet  a  crisis. 
And  as  long  as  some  banks  pursue  vicious  methods  the 
safety  of  all  is  more  or  less  endangered  thereby;    for  the 

1  President  Murray  at  meeting  of  American  Bankers'  Association,  Octo- 
ber, 1 888. 


PROPOSALS  FOR  REPLACEMENT.  247 

competition  for  business  must  under  such  circumstances 
tend  to  relax  the  strictness  of  the  rules  of  sound  bank- 
ing. That  the  more  carelessly  conducted  banks  do,  in 
the  opinion  of  sound  bankers,  bring  on  some  such  a  con- 
dition of  affairs  is  proven  by  the  necessity  which  the  con- 
servative banks  of  New  York  have  several  times  been 
under  of  pooling  their  reserves  with  the  weaker  banks  for 
the  issue  of  clearing-house  certificates.  It  has  several 
times  occurred  that  the  better  banks  have  been  forced  to 
this  action  because  the  downfall  of  the  institutions  whose 
vicious  banking  had  helped  to  demoralize  the  market 
would  have  put  the  better  banks  themselves  in  jeopardy. 
The  vain  attempts  that  have  several  times  been  made  to 
induce  the  New  York  City  banks  to  pledge  themselves 
against  such  vicious  practices  as  over-certification  of 
checks,  and  the  payment  of  interest  on  balances,  is  proof 
enough  that  there  are  some  parts  of  our  bank  manage- 
ment that  need  strengthening.  It  is  unfortunate  that, 
while  the  great  majority  of  our  banks  are  conducted  on 
sound  principles,  and  conservatively  managed,  it  should 
be  possible  for  a  few  over-greedy-institutions  to  intro- 
duce into  the  monetary  world  an  element  of  danger. 
None  appreciate  the  evil  of  this  state  of  affairs  more 
keenly  than  do  conservative  bankers,  and  none  are  more 
severe  in  their  condemnation  of  the  practices  that  make 
it  possible.  The  possibility  of  its  occurrence,  however, 
makes  it  necessary  that  in  case  the  government  should 
intrust  the  banks  with  its  deposits,  some  means  should 
be  adopted  to  root  out  the  censurable  practices  that  are 
a  source  of  danger. 

There   is  another  possible  difficulty  which  appertains 
rather  to  the  present  conditions  of  the  use  of  banks  than 

l  See,  for  example,  the  report  of  the  Clearing  House  Committee,  iS;^. 


248  THE  INDEPENDENT  TREASURY. 

to  that  use  itself.  The  inelastic  character  of  our  paper 
money  tends,  as  we  have  seen,1  to  keep  the  volume  of 
currency  in  the  channels  of  trade  at  the  maximum  needed 
when  business  is  brisk.  Now,  if  the  government  deposited 
all  its  receipts  in  the  banks,  these  institutions  would 
have,  in  dull  times,  more  money  than  they  could  profit- 
ably use.  This  would  drive  them  to  seek  opportunities 
to  loan,  would  make  competition  to  discount  even  more 
keen  than  it  is,  and  might  induce  unhealthy  speculation 
by  forcing  down  the  rate  of  discount.  Such  speculation 
would  endanger  deposits.  It  could  not  produce  an  infla- 
tion from  the  issue  of  notes,  as  it  did  in  1837,  unless  the 
rate  of  discount  charged  were  high  enough  to  offset  the 
premium  on  government  bonds,  and  so  induce  deposits  of 
bonds  for  circulation.  The  inflation  would,  however,  be 
promoted  by  loans  from  the  deposits ;  but  it  would  also  be 
limited  by  the  law  which  forbids  discounts  to  more  than 
double  the  paid-up  capital.  It  would  not  be  possible, 
then,  under  the  most  adverse  circumstances  for  specula- 
tion to  enlarge  loans  so  disastrously  as  was  the  case  in 
1837,  when  the  paper  issue  was  based  on  deposits,  and 
that,  too,  at  a  rate  which  was  not  limited  by  a  conserva- 
tive percentage  of  reserve.  The  danger  from  speculation, 
caused  by  the  use  of  government  deposits  in  dull  times, 
could  not,  therefore,  be  great. 

Another  disadvantage  that  would  come  from  supplant- 
ing the  Independent  Treasury  with  banks,  as  the  banks 
are  at  present  regulated,  arises  from  the  fact  that  the 
banks  cannot,  under  the  law,  use  to  check  crises  the 
power  that  is  afforded  by  a  variable  rate  of  discount,  ex- 
cept up  to  the  point  which  the  law  fixes  as  a  maximum, 
usually  six  per  cent.  This  method  of  controlling  crises 
1  See  p.  146. 


PROPOSALS  FOR   REPLACEMENT.  249 

is,  therefore,  largely  beyond  their  reach,  and  its  absence 
is  only  partly  made  up  for  by  the  common  devices  for 
evading  the  usury  laws.  This,  however,  like  several 
other  objections,  amounts  only  to  a  criticism  of  the  pres- 
ent conditions  governing  the  use  of  banks  as  public 
depositories. 

The  conclusions  of  our  consideration  of  the  disadvan- 
tages which  would  follow  a  larger  use  of  banks,  are  that 
the  most  important  objections,  the  principal  things  that 
must  be  provided  against  if  the  banks  are  to  be  more 
fully  utilized,  are  the  possibility  of  failure  to  honor 
drafts  promptly,  and  the  lack  of  any  special  provision  for 
crises.  Provision  should  be  made  also  for  a  greater 
elasticity  of  the  currency,  for  insuring  the  continued 
safety  of  the  public  deposits,  and  for  preventing  the  banks 
from  getting  an  undue  share  of  profit  from  use  of  them. 

But  the  question  arises,  —  What  kind  of  banks  are  best 
suited  for  use  as  government  depositories?  Shall  the 
national  banking  system  continue  to  be  used?  Or  will 
State  institutions  answer  the  purpose  better?  Or  shall 
some  entirely  new  institution  be  created?  Various  an- 
swers have  been  given  to  these  questions.  Some  have 
advocated  simply  an  enlarged  use  of  the  national  banks 
under  existing  laws.  But  as  the  preceding  examination 
has  disclosed,  this  would  make  no  provision  for  insuring 
prompt  payment  of  government  drafts,  or  for  tiding  over 
stringencies  in  the  money  market.  Various  modifications 
of  our  banking  system  have  been  proposed,  the  establish- 
ment of  which  would  insure  greater  elasticity  to  our  cur- 
rency than  the  arbitrary  workings  of  the  Independent 
Treasury  produce,  while  yet  leaving  that  system  in  oper- 
ation. Of  course,  the  attainment  of  this  end,  though  only 
a  partial  cure, would  be  very  beneficial. 


250  THE   INDEPENDENT  TREASURY. 

As  early  as  187 1  a  plan  was  proposed  for  the  relief  of 
stringencies  and  crises,  known  as  the  "3.65  bond  plan." 
The  proposal 1  was  for  the  government  to  issue  convertible 
bonds  at  3.65  per  cent  interest.  These  were  to  be 
issued  at  par,  and  cashed  at  par  on  demand,  and  were  to 
be  made  usable  for  bank  reserves.  When  the  money 
market  became  stringent  these  bonds  "would  go  in  for 
cash,  and  on  an  easy  money  market  they  would  flow  out 
again."  The  objections  to  this  scheme  are  so  great  that 
it  is  altogether  unlikely  that  it  could  be  adopted.  The 
arguments  against  the  proposed  issue  are  that  it  would  be 
a  virtual  inflation  of  the  currency,  would  compel  the  gov- 
ernment to  pay  interest  on  the  bank  reserves,  and  would 
necessitate  a  change  in  our  policy  of  debt  payment. 

In  1873  a  scheme  for  securing  elasticity  was  proposed 
by  the  committee  on  banking  and  coinage  in  the  House 
of  Representatives,  the  main  features  of  which  were  as 
follows:2  first,  that  all  legal  restrictions  on  bank  cur- 
rency should  cease;  second,  that  bank-notes  should  be 
promptly  redeemed  through  an  assorting-house  in  Wash- 
ington, with  a  branch  at  New  York,  whereby  the  notes 
should  be  sent  home  for  redemption  daily;  third,  that 
each  bank  must  deposit  in  the  United  States  Treasury 
a  reserve  of  greenbacks  equal  to  five  per  cent,  of  its  out- 
standing notes;  and,  fourth,  that  the  banks  should  be 
relieved  from  the  obligation  to  keep  fifteen  or  twenty-five 
per  cent,  of  reserve  on  their  circulation.  This  last  clause 
was  incorporated  in  the  act  of  June  20,  1874,  amending 
the  national  banking  law;  but  the  bill,  as  a  whole,  did 
not  become  a  law. 

1  For  an  account  of  the  plan  see  Hunt's  Merchants'  Magazine,  Year  Book, 
i87i,p.  224. 

2  See  the  Commercial  and  Financial  Chronicle ,  Dec.  13,  1873. 


PROPOSALS  POP  REPLACEMENT.  25  I 

The  Hon.  John  Jay  Knox,  Comptroller  of  the  Currency 
in  1876,  and  afterwards  president  of  the  National  Bank 
of  the  Republic,  New  York  City,  advocated  a  plan  for  a 
permanent  national  bank  circulation,1  the  provisions  of 
which  would  have  promoted  a  greater  elasticity  if  it  had 
been  adopted.  Its  chief  novel  feature  was  a  provision 
that  circulating  notes  should  be  secured,  partly  by  de- 
posit of  bonds  and  bullion,  and  partly  by  a  safety  fund. 

Still  another  scheme  has  been  suggested,  the  direct 
purpose  of  which  is  the  partial  removal  of  the  injurious 
influences  of  the  Independent  Treasury.  It  has  been 
proposed  to  deposit  the  money  of  the  government  in  the 
national  banks  in  response  to  bids  therefor  from  the 
banks.2  The  Secretary  of  the  Treasury,  according  to 
the  plan,  would  advertise  for  such  bids,  securing  the  publi- 
cation of  the  rates  of  interest  offered  on  the  deposits  by 
different  banks,  the  security  offered,  and  the  amount  of 
deposit  wanted.  The  money  would  then  be  deposited 
with  the  highest  bidder.  There  are  various  objections 
to  such  a  plan.  If  the  bank  offering  the  best  rates  did 
not  want  all  the  money  the  government  desired  to  deposit, 
it  would  be  unfair  to  compel  it  to  adhere  to  its  rate  for 
the  part  assigned  to  it,  while  letting  the  rest  go  to  other 
bidders  at  lower  rates.  Moreover,  the  competition  en- 
gendered would  act  unfavorably  when  money  was  "dear," 
by  tending  to  influence  the  banks  to  offer  higher  rates  than 
they  could  really  afford,  and  by  tending  to  promote  specu- 
lation so  as  to  secure  returns  to  pay  those  higher  rates. 
Banks  with  large  capital  and  surplus  could,  if  caught  in 
difficulty,  secure  the  deposits  to  the  injury  of  smaller 
banks,  and  an  abnormal  distribution  of  currency  might 

1  See  H.  R.  Bill  5,iSo,  1st  Session,  51st  Congress,  16th  Jan.,  1890. 

2  See  Bankers'  Magazine,  July,  1891. 


252  THE   INDEPENDENT   TREASURY. 

temporarily  be  caused.  The  special  purpose  of  the  plan 
seems  to  be  to  provide  for  remuneration  for  the  use  of 
public  money.  That  is  desirable,  but  it  can  be  secured 
in  other  ways  that  shall  also  secure  other  results  of 
greater  importance. 

The  most  systematic  and  exhaustive  scheme  that  has 
been  proposed  for  replacing  the  Independent  Treasury 
system  is  made  by  the  Hon.  Conrad  N.  Jordan  of  New  York 
City,  who  was  treasurer  of  the  United  States  in  1885-86. 
The  important  parts  x  of  Mr.  Jordan's  plan  are  as  follows  : 
He  would  have  Congress  establish  an  "Associated  Na- 
tional Bank"  in  New  York  City,  the  stock  in  which 
should  be  held  by  the  banks  of  the  country,  both  State 
and  National,  which  should  be  the  central  depository  of 
the  government,  and  on  whose  capital,  together  with  that 
of  the  subscribing  banks,  the  deposits  of  the  government 
should  be  made  a  preferred  lien.  This  bank  should  not 
issue  notes,  according  to  Mr.  Jordan,  except  in  crises, 
and  then  only  when  the  rate  of  interest  in  New  York  City 
reached  eight  per  cent.  The  bank  should  pay  all  govern- 
ment "  interest,  receiving  such  compensation  therefor  as 
may  be  agreed  on;  shall  register  the  debt  of  the  United 
States;  [and]  shall  do  a  general  banking  business,  ex- 
cept that  it  shall  not  receive  the  deposits  of  persons  or 
firms  other  than  banks  or  bankers."  The  Associated 
Bank  shall,  under  certain  regulations,  perform  the  re- 
demption duties  now  performed  in  the  office  of  the  Comp- 
troller of  the  currency.  All  government  receipts  in  New 
York  City  should  be  deposited  in  the  Associated  Bank, 
and  the  receipts  at  all  other  points  in  the  different  na- 
tional banks,  under  the  direction  of  the  Associated  Bank, 
and  if  any  receives  an  excess  of  deposits  over  security 
l  See  Appendix, p.  xiv.  forthe  full  text  of  Mr.  Jordan's  plan. 


PROPOSALS  FOR  REPLACEMENT.  253 

provided,  it  must  immediately  forward  the  excess  to 
the  Associated  Bank.  The  Associated  Bank,  Mr.  Jordan 
thinks,  should  be  further  permitted,  or  empowered,  to 
have  foreign  accounts,  and  to  transact  a  general  exchange 
business,  and  should  keep  fifty  per  cent,  reserve  on  all 
liabilities,  twenty-five  per  centum  of  which  might  be  in 
"sight  exchange  on  London,  Paris,  Amsterdam,  Frank- 
fort, or  Berlin."  Other  provisions  are  for  a  variable  rate 
of  discount  at  the  discretion  of  the  board  of  directors,  for 
the  issue  of  small  notes  based  on  silver,  and  of  notes  to 
replace  national  bank  notes  that  failed  to  be  redeemed, 
and  for  securing  a  fair  compensation  to  the  government 
for  the  privileges  granted  the  bank.  The  national  banks 
should  be  allowed  to  extend  their  issues  to  any  amount 
on  the  deposit  of  coin  and  bullion.  The  Secretary  of  the 
Treasury  should,  under  this  system,  "  be  empowered  to 
issue  Treasury  warrants  or  bills  at  such  rate  of  interest 
as  may  be  agreed  upon  from  time  to  time,  to  meet  any 
sudden  emergency,  and  be  accountable  to  the  House  of 
Representatives  as  to  the  necessity  for  such  issue." 

The  ingenious  plan  thus  briefly  outlined,  if  put  in  oper- 
ation, would  undoubtedly  go  far  towards  remedying  the 
evils  to  which  the  Independent  Treasury  gives  rise.  The 
security  provided  for  the  public  deposits  is  of  the  same 
kind  as  is  demanded  now,  and  is  ample  to  insure  their 
ultimate  safety;  but  no  better  provision  is  made  than 
now  exists  for  preventing  delay  in  meeting  drafts  of 
the  government.  The  provision  that  one-half  the  reserve 
may  be  in  "sight  "  foreign  exchange,  while  an  excellent 
thing  for  giving  the  bank  a  certain  control  over  the  drain 
of  gold,  would  prove  dangerous  if  the  houses  on  which 
the  bills  were  drawn  should  be  suffering  from  a  crisis 
too.      Drafts    on   the    Barings    in    the  fall  of  1890  would 


254  THE   INDEPENDENT  TREASURY. 

not  have  strengthened  confidence  in  New  York  at  that 
time. 

There  is  ground,  too,  for  objection  to  the  issue  of  notes 
by  this  bank  in  crises,  because  the  currency  would  be  an 
unusual  one,  a  new  kind  added  to  the  numerous  kinds 
of  paper  already  afloat,  whereas  the  purpose  of  their 
issue  could  be  as  well  accomplished  by  a  temporary  en- 
largement of  the  currency  already  in  use. 

Moreover,  meritorious  as  the  scheme  of  Mr.  Jordan  is, 
there  is  ground  for  objecting  to  it  because  it  proposes 
the  establishment  of  novel  machinery  for  accomplishing 
what  can  be  done  through  agencies  already  established, 
by  making  changes  to  adapt  them  to  the  new  require- 
ments. 

The  agencies  that  should  be  used  for  doing  the  work  of 
the  Independent  Treasury,  to  do  away  with  its  evils  and 
to  render  whatever  advantages  it  has  more  uniform  and 
general,  are  the  banks  and  the  various  clearing-houses. 
These  are  institutions  already  established,  and  familiar 
to  the  people,  and  they  could  be  adapted  to  their  pro- 
posed new  functions  without  great  changes.  They  are 
the  most  convenient  means  for  keeping  the  public  depos- 
its, because  they  are  the  money  reservoirs  of  business ; 
and  their  use  as  depositories  would  prevent  the  tapping, 
so  to  speak,  of  the  streams  of  money  that  flow  to  and 
from  them.  The  public  money  would  be  at  the  call  of 
the  government,  and  would  yet  be  available  in  business 
to  a  large  extent. 

The  banks  are  the  best  agents  for  the  management  of 
crises  also.  Under  the  existing  arrangements  the  ques- 
tion whether  aid  shall  be  extended  to  relieve  a  crisis  or 
avert  a  threatened  panic  is  decided  by  the  Secretary  of 
the  Treasury.     That   is,  the  decision   as  to  whether  the 


PROPOSALS  FOR  REPLACEMENT.  255 

state  of  the  market  is  such  as  to  foreshadow  a  panic  and 
necessitate  such  a  course  of  action,  depends  on  the  judg- 
ment of  one  man,  who  is  not  in  direct  touch  with  the 
business  situation,  who  is  at  a  distance  from  the  great 
money  market  of  the  country,  and  for  whom  the  duty  of 
making  such  a  decision  is,  so  to  speak,  incidental.  In 
order  to  be  able  to  act  intelligently  at  such  a  time  the 
Secretary  of  the  Treasury  must  keep  well  informed  on 
the  state  of  the  money  market,  must  judge  correctly  of  the 
necessity  and  the  time  for  action,  and  must  be  able  to 
select  the  mode  of  disbursement  best  fitted  to  accomplish 
the  purpose  of  furnishing  full  and  immediate  relief.  The 
necessity  of  fulfilling  these  conditions  "  makes  the  will  and 
judgment  of  the  Secretary  of  the  Treasury  at  times  a  po- 
tent factor  in  business."  The  time  and  conditions  to  dis- 
count a  panic  can  be  better  known  to  an  individual  who 
is  in  close  touch  with  the  business  community,  or  rather  is 
himself  a  part  of  that  community;  and  they  can  be  still 
better  known  to  a  number  of  such  individuals,  or  com- 
binations of  such  individuals.  The  banks,  in  short, 
constitute  the  best  agents  for  the  purpose.  They  have 
the  requisite  knowledge,  the  necessary  business  relations, 
and  a  sensitiveness  to  the  state  of  business  soundness 
that  no  other  individual  or  institution  possesses.  They 
feel  immediately  any  change  in  trade  that  indicates  ab- 
normal conditions.  And,  finally,  they  are  the  agents  to 
which  the  community  naturally  looks  to  regulate  the 
monetary  situation  in  a  crisis.  It  is  one  of  their  func- 
tions, the  performance  of  which  is  part  of  the  normal 
action  of  the  business  machinery  of  the  community.  The 
action  of  the  government  in  the  relief  of  a  crisis  is.  on 
the  other  hand,  an  arbitrary  action,  one  not  automatically 
responsive  to  the  conditions  it  seeks  to  meet.     Such  an 


256  THE   INDEPENDENT  TREASURY. 

action  may,  however,  prevent  much  evil,  and  be  the  occa- 
sion of  much  good ;  but  a  continued  resort  to  it  can  be 
justified  only  if  no  other  course  is  open  that  will  produce 
the  same  results,  and  at  the  same  time  be  free  from  arbi- 
trariness. 

Hence,  the  government  cannot  be  expected  to  exercise 
so  salutary  a  control  over  the  flux  and  reflux  of  the  money 
market  as  can  the  banking  institutions  of  the  country, 
if  they  are  conducted  on  sound  principles  and  with  ordi- 
nary business  intelligence  and  integrity.  To  the  banks, 
therefore,  should  be  intrusted  the  keeping  of  the  public 
money  and  the  direct  management  of  crises. 


REORGANIZATION  OF   THE  BANKING  SYSTEM     2$? 


CHAPTER   IX. 

A  REORGANIZATION  OF  THE  BANKING  SYSTEM 
TO  REPLACE   THE   INDEPENDENT  TREASURY. 

The  opinion  was  expressed  in  the  preceding  chapter 
that  the  banks  and  the  clearing-houses  are  the  proper  in- 
stitutions for  keeping  the  government  deposits  and  for 
managing  crises.  The  statement  can  be  narrowed  some- 
what, so  as  to  apply  only  to  the  national  banks  and  the 
clearing-houses.  It  is  not  necessary  to  discuss  here  the 
comparative  merits  of  National  and  State  banks.  But 
only  the  national  banks  should  be  used,  because  they  are 
the  only  ones  over  which  the  national  government  can 
exercise  direct  control.  The  national  banking  system  has 
faults,  but  it  has  served  its  purpose  of  furnishing  a  uniform 
and  safe  currency  so  long  that  it  ought  to  be  preserved. 
Its  failure  to  make  our  currency  elastic  is  due  in  part  to 
unwise  regulations  regarding  the  security  and  redemption 
of  notes,  and  to  limitations  on  the  use  of  the  reserve  ;  but 
more  so  to  other,  independent,  features  of  our  currency 
system,  especially  the  use  of  government  notes,  and  out- 
silver  policy.    But  these  are  defects  that  can  be  remedied. 

Any  proposal  for  a  more  extended  use  of  the  national 
banks  as  public  depositories,  and  for  enlarging  their 
functions  as  regulators  of  the  currency,  must,  of  course, 
have  in  view  the  fact  that  in  a  few  years  more  the  system 
will  pass  out  of  existence,  and   must,   therefore,   include 


258  THE   INDEPENDENT  TREASURY. 

some  suggestions  for  its  perpetuation  in  some  form. 
The  plan  about  to  be  outlined  assumes  that  the  national 
banking  system  will  be  continued.  There  is  really  no 
good  reason  why  it  should  be  allowed  to  disappear,  for 
the  only  condition  affecting  its  existence  which  will  soon 
change  is  the  extinction  of  the  national  debt.  But  it  is 
difficult  to  see  what  valid  objection  can  be  made  to  bas- 
ing the  circulation  on  other  than  government  bonds. 
The  law  permits  the  Secretary  of  the  Treasury  to  accept 
other  than  United  States  bonds  as  security  for  public  de- 
posits; if  there  are  other  bonds  which  in  the  opinion  of 
Congress  are  sufficiently  secure  for  that  purpose,  it  may 
fairly  be  assumed  that  Congress  should  consider  the  same 
kind  of  bonds  a  sufficient  surety  for  bank  issues.  Rail- 
roads or  municipal  bonds  of  high  character  would  be  a 
safe  basis  for  circulating  notes,  if  their  acceptance  were 
subject  to  such  conditions  1  as  were  proposed  by  the  Hon. 
M.  I).  Harter  of  Ohio,  in  Congress,  in  the  session  of  1891- 
92.  These  conditions  are  substantially,  that  the  bonds 
shall  be  gold  bonds  that  have  not  fallen  below  par  for 
several  years  preceding  their  acceptance  as  security,  are 
secured  by  mortgage  on  road-bed  and  track,  if  they  are 
railroad  bonds,  the  interest  on  which  has  never  been  de- 
faulted and  which  are  regularly  listed  on  some  important 
stock  exchange.  If  city  bonds  are  accepted,  the  tax  levy 
of  the  municipality  issuing  them  must  not  exceed  two  per 
cent,  per  annum.  Bonds  of  such  character,  with  proper 
regulations  for  replacing  them  if  they  depreciated,  would 
furnish  ample  security.  Premising,  then,  that  the  national 
banking  system  will  be  continued  by  some  such  provision 
as  this,  it  seems  that  the  Independent  Treasury,  with  its 
bad  influence  on  the  money  market,  could  be  replaced  with 

1  Mr.  Harter's  proposals  are  given  in  full  in  Appendix,  p.  ix. 


REORGANIZATION  OF   77//-:   BANKING  SYSTEM.    259 

the  banks  as  depositories,  by  modifying  the  banking  laws 
in  accordance  with  the  following  suggestions:  — 

Provisions  for  Deposits. 

1.  Make  the  clearing-houses  of  the  four  or  five  most 
important  cities  in  different  sections  of  the  country  agents 
of  the  government  in  its  relations  with  the  banks,  divid- 
ing the  country  into  departments,  and  putting  one  of 
the  clearing-houses  at  the  head,  for  government  busi- 
ness, of  all  the  banks  in  a  department. 

2.  Require  every  national  bank  to  become  a  member 
of  the  clearing-house  in  its  section  or  department. 

3.  Deposit  all  government  money  in  the  national  banks, 
with  the  exceptions  noted  below,  and  require  all  gov- 
ernment receipts  and  payments  to  pass  through  these 
banks,  as  far  as  possible,  on  these  conditions:  — 

a.  The  bank  seeking  to  become  a  government  de- 
pository shall  deposit  with  its  clearing-house,  bonds 
of  the  character  required  as  security  for  circulation,  of 
such  amount  as  in  the  discretion  of  the  secretary  may  be 
required,  but  never  to  be  suffered  to  become  less  than 
the  par  value  of  the  amount  of  public  money  held  by  the 
bank. 

b.  The  clearing-house  shall  have  the  right  to  reject, 
under  general  rules  adopted  by  all  the  clearing-houses 
and  approved  by  the  Secretary  of  the  Treasury,  any  of 
the  bonds  offered  that  it  deems  unsafe,  and  shall  then 
forward  those  deemed  safe  to  the  United  States  Treas- 
urer at  Washington. 

c.  On  receipt  of  these  bonds  by  the  treasurer,  the 
bank  shall,  on  the  order  of  the  treasurer,  receive  a  de- 
posit  of  public   money  from  its   clearing-house,  if  there 


260  THE  INDEPENDENT  TREASURY. 

is  a  surplus  there,  or  else  by  transfer  from  any  department 
where  a  surplus  lies,  and  shall  also  be  appointed  a  col- 
lector and  disburser  of  public  money  under  proper  regu- 
lations. 

d.  All  depository  banks  shall  make  daily  reports  to 
their  respective  clearing-houses,  and  the  clearing-houses 
to  the  Secretary  of  the  Treasury. 

e.  Any  loss  to  the  government  from  false  returns  or 
from  depreciation  of  the  bonds  deposited  shall  be  made 
good  by  the  clearing-house ;  that  is,  by  the  banks  asso- 
ciated therein,  provided  that  the  Secretary  of  the  Treasury 
notify  the  clearing-house  of  such  depreciation  within  a 
reasonable  time  after  it  occurs. 

/.  All  drafts  for  government  money  shall  be  made  di- 
rectly on  the  banks.  If  any  bank  fails  to  pay  a  draft  on 
demand,  the  clearing-house  shall  pay  it  on  demand,  and 
any  other  national  bank  may  at  its  discretion  do  so,  and 
shall  then  be  reimbursed,  on  presentation  of  the  draft 
with  proof  of  its  dishonor,  for  the  principal,  costs,  and 
interest,  by  the  clearing-house  of  the  department  in 
which  the  defaulting  bank  is  situated. 

g.  If  on  any  day  a  depository  bank  receives  a  surplus 
of  public  money  over  the  par  value  of  its  bonds  depos- 
ited, it  shall  immediately  deposit  more  bonds,  or  shall 
transfer  the  surplus  on  the  order  of  the  Secretary  of  the 
Treasury  to  some  other  bank  whose  deposit  of  bonds  ex- 
ceeds in  value  its  holdings  of  public  money;  or,  if  there 
is  no  such  bank  in  the  department,  the  secretary  shall 
order  the  money  to  be  transferred  to  the  clearing-house, 
there  to  be  held  as  a  special  deposit,  sealed  under  the 
seal  of  some  proper  officer  of  the  United  States,  to  be 
opened  again  only  in  his  presence,  on  order  of  the  Sec- 
retary of  the  Treasury,  for  transfer  to  some  bank,  or   to 


REORGANIZATION  OF   THE  BANKING  SYSTEM.     26l 

some  other  clearing-house  department,  or  to  the  United 
States  Treasury  at  Washington. 

//.  Transfers  of  surpluses  may  be  made  by  the  Sec- 
retary of  the  Treasury  from  one  clearing-house  to  an- 
other for  distribution  among  the  depository  banks,  on 
the  deposit  of  bonds,  as  before  provided.  If  there  are 
not  enough  government  receipts  to  meet  the  demand  for 
deposits  in  any  section,  the  Secretary  of  the  Treasury 
may  make  transfers  to  such  as  offer  a  premium  for  the 
deposit,  in  addition  to  the  usual  security. 

/.  If  a  surplus  of  earnings  remains  after  the  payment 
of  an  annual  dividend  of  [six]  1  per  cent,  on  capital,  and 
the  assignment  of  the  required  quota  to  the  surplus  and 
redemption  funds,  the  government  shall  be  credited  with 
part  of  said  surplus  in  the  ratio  which  its  average  monthly 
deposits  for  the  year  have  borne  to  the  total  cash 
deposits. 

4.  All  government  money  shall  be  deposited  in  the 
banks  in  accordance  with  the  foregoing  provisions,  ex- 
cept the  $100,000,000  of  gold  commonly  known  as  the 
"greenback  reserve,"  and  the  gold  and  silver  bullion 
on  deposit  to  secure  coin  and  bullion  certificates. 

Provisions  for  Elasticity  of  the  Currency. 

1.  Circulating  notes  should  be  issued  on  deposit  at 
Washington  of  such  bonds  as  have  already  been  de- 
scribed, or  of  gold  and  bonds,  and  the  amount  of  issue 
should  be  the  par  value  of  the  deposit. 

2.  In  a  crisis  each  bank  should  be  allowed  to  expand 
its  issue  of  notes  [twenty-five]  per  cent  over  the  par  value 
of  the  security  deposited,  provided  the  bonds  do  not  fall 

1  The  brackets  are  used  to  show  that  the  amounts  suggested  are  tentative. 


262  THE   INDEPENDENT  TREASURY. 

below  par  on  account  of  the  crisis;  and  each  bank  should 
also  be  allowed  to  deposit  gold  coin  or  bullion  as  a 
basis  for  the  further  issue  of  notes  in  the  same  ratio,  to 
be  held  on  special  deposit  at  its  clearing-house  for  the 
purpose  of  redemption.  In  order  to  avoid  delay  in  a 
crisis  each  bank  should  at  all  times  keep  at  its  clearing- 
house, on  special  deposit,  a  certain  amount  of  extra 
notes.  These  notes  should  be  sealed  away  under  the 
seal  of  a  United  States  inspector,  and  an  account  of  them 
should  at  all  times  be  kept  with  the  Treasurer  of  the 
United  States. 

3.  Permission  to  use  these  extra  notes  for  the  purpose  of 
the  expansion  just  spoken  of  must  be  secured  from  the 
Secretary  of  the  Treasury,  and  the  Secretary  shall  give 
such  permission  under  the  following  circumstances,  and 
then  only: 

a.  He  must  have  received  from  the  clearing-house 
notification  of  the  necessary  deposit. 

b.  The  rate  of  discount  on  call  loans  in  New  York 
City  must  have  reached  [eight]  per  cent. 

4.  All  net  profit  over  [one]  per  cent,  accruing  from 
this  extra  issue  of  notes  must  be  credited  to  the  govern- 
ment. 

5.  No  bank  shall  discount  below  [eight]  per  cent,  while 
any  notes  of  this  extra  issue  are  outstanding,  and  any 
bank  may  offer  a  premium  on  such  notes,  in  order  to  call 
them  in.  If  any  of  them  are  outstanding  at  the  end 
of  one  month,  the  bank  may  be  required,  at  the  discre- 
tion of  the  Secretary  of  the  Treasury,  to  deposit  gold 
coin  or  bullion  to  cover  the  excess,  and  at  the  end  of  two 
months  such  deposit  shall  be  required. 

6.  All  the  usury  laws  of  the  States  should  be  repealed, 
so  far,  at  least,  as  they  relate  to  short-time  loans,  and  no 


REORGANIZATION  OF   THE  BANKING  SYSTEM.    263 

national  bank  should  be  allowed  to  make  discounts  for 
a  longer  time  than  [six    months]. 

7.  The  payment  of  interest  on  deposits  should  be 
forbidden;  and  the  law  which  allows  deposits  of  country 
banks  in  banks  of  reserve  cities  to  count  as  part  of  the 
reserve  of  both  should  be  repealed. 

8.  Every  national  bank  should  be  forbidden  to  pay 
out  the  notes  of  any  other,  but  should  be  compelled  to 
receive  them  at  par  and  forward  them  to  its  clearing- 
house for  redemption. 

9.  Each  bank  should  keep  at  its  clearing-house  a  re- 
demption fund  equal  to  [five]  per  cent,  of  its  circulation. 
If  any  bank  should  fail  to  redeem  a  note  of  its  own  issue 
on  demand,  the  holder  may  seek  its  payment  by  either  of 
the  methods  provided  for  the  payment  of  government 
drafts,1  and  the  defaulting  bank  shall  immediately  be  put 
into  the  hands  of   a  receiver,  and  its  affairs  wound  up. 

10.  A  reserve  of  at  least  [twenty]  per  cent,  of  deposits 
should  always  be  kept  on  hand,  except  as  follows:  When 
the  discount  rate  on  call-loans  at  any  of  the  central  cities 
in  which  the  clearing-houses  are  situated  rises  to  [ten] 
per  cent.,  the  reserve  of  any  bank  in  that  department  may 
be  allowed  to  fall  to  [fifteen]  per  cent,  of  its  total  deposits. 

11.  In  a  crisis  clearing-house  certificates  may  be 
issued  subject  to  the  regulations  which  now  govern  their 
issue  in  New  York  City. 

There  is  nothing  in  these  proposals  that  involves  a  wide 
departure  from  institutions  and  methods  already  familiar, 
and  they  provide  for  the  ultimate  safety  and  the  prompt 
payment  of  the  public  deposits,  for  expansion  of  the  cur- 
rency in  crises,  for  the  prevention  of  congestion  of 
money  at  great  centres,  and  for  variation  in  the  volume 
of  bank  currency  in  response  to  business  demands. 
1  See  Section  f.,  p.  260. 


264  THE   INDEPENDENT  TREASURY. 

No  mention  is  made  in  them  of  "  lawful  money  "  other 
than  gold  as  a  provision  for  reserve.  It  would  be  a 
great  precaution  for  future  safety  if  the  existing  govern- 
ment notes  were  retired  and  their  place  supplied  by  bank 
currency.1  In  that  event  the  banks  should  be  taxed  so 
as  to  secure  for  the  public  as  much  as  possible  of  the  net 
profit,  allowing  for  trouble  and  expense,  derived  from 
the  issue  of  the  notes.  The  currency  of  the  country 
would  then  be  more  elastic,  because  more  purely  com- 
mercial. Under  these  circumstances  the  national  bank 
issues  would  doubtless  be  sufficient  to  meet  all  demands 
for  money,  but  there  would  be  no  objection  to  allowing 
the  State  Banks  again  to  become  banks  of  issue,  if  it 
were  necessary.  For  their  notes  would  not  be  likely  to 
attain,  under  the  competition  of  the  national  banks,  a 
wide  circulation;  and  under  that  competition  would  not 
attain  any  circulation  at  all  unless  always  redeemable  at 
par,  provided  denominations  were  not  allowed  smaller 
than,  say,  twenty  dollars.  For  these  would  not  get 
largely  into  the  hands  of  ignorant  people  who  might 
hoard  them  and  in  so  far  diminish  the  demand  for  fre- 
quent redemption  which  would  make  the  banks  careful. 
But  if  the  State  banks  were  allowed  to  issue  notes,  other 
restrictions  than  the  limitation  of  notes  to  denominations 
not  less  than  twenty  dollars  should  be  imposed.  They 
should  be  required  to  keep  a  larger  proportionate  per- 
centage of  reserve  against  their  deposits  and  issues  than 
the  national  banks  would  be  required  to  keep  against 
their  deposits.  This  could  be  accomplished  by  allowing 
a  certain  minimum  of  issue  for  capital,  and  then  taxing 
the  notes  at  a  rapidly  increasing  rate  as  their  ratio  to 
the  reserve  increased. 

1  Of  course  United  States  notes,  as  at  present  regulated,  are  safe  arid,  very 
convenient.     The  only  danger  is  in  a  possible  future  over-issue, 


REORGANIZATION  OF   THE   BANKING    SYSTEM.    265 

The  putting  of  the  above  proposals  into  practice 
would  involve  giving  the  clearing-houses  the  character  of 
branches  of  the  Treasury  Department.  This  division  of 
their  work  should  be  additional  to  their  present  functions, 
and  need  not  interfere  with  these  at  all.  The  government 
division  of  each  clearing-house  should  be  under  the  im- 
mediate management  of  some  officer  corresponding  to 
the  present  assistant  treasurers.  The  central  cities  at 
which  these  government  clearing-houses  should  be  lo- 
cated might  well  be  New  York,  Chicago,  New  Orleans, 
and  San  Francisco.  Perhaps  it  might  be  advisable  to 
add  St.  Louis  and  one  other  centre. 

The  use  of  the  clearing-houses  in  this  way  would  in- 
volve a  saving  of  a  large  part  of  the  cost  of  the  existing 
sub-treasuries,  and  so  reduce  the  expenses  of  the  gov- 
ernment. 

The  union  of  all  the  national  banks  in  each  section  in 
the  manner  proposed,  would  give  them  a  unity  of  inter- 
ests that  would  cause  them  to  guard  jealously  against 
vicious  methods  of  business  by  any  one  bank.  The 
members  of  each  clearing-house  should  be  able  by  a 
proper  vote  to  coerce  a  bank  that  indulged  in  bad  bank- 
ing practices. 

The  provisions  for  the  safety  of  the  public  deposits  are 
ample,  for  only  bonds  of  first-class  character  would  be 
accepted,  and  only  after  receiving  the  approval  of  both 
the  clearing-house  officers  and  the  Secretary  of  the  Treas- 
ury. These  officers  would  be  likely  to  have  a  wider 
acquaintance  with  the  character  of  the  bonds  offered  than 
would  the  Secretary,  and  consequently  their  approval 
would  be  a  great  safeguard.  An  additional  one  would 
be  found  in  the  daily  reports  to  both  the  clearing-house 
and  the   Secretary.      Moreover,  the  whole  assets  of  the. 


266  THE  INDEPENDENT  TREASURY. 

banks  associated  in  the  clearing-house  would  be  behind 
the  government  deposits  as  ultimate  security.  Loss 
would  be   impossible. 

Promptness  of  payment  of  government  drafts  would  also 
be  abundantly  secured.  For  the  failure  of  the  bank  on 
which  the  draft  was  drawn  would  necessitate  only  the 
delay  of  presenting  it  to  another  bank,  or,  at  farthest,  to 
the  clearing-house.  Payment  under  such  circumstances 
now  must  be  delayed  until  after  the  sale  of  the  bonds 
deposited. 

Moreover,  the  provisions  for  the  deposit  of  public 
money  make  the  amount  of  such  deposits  at  any  time  de- 
pend entirely  on  the  demand  of  the  banks.  Hence,  when 
there  was  an  active  demand  for  money,  the  government 
money  would  flow  from  the  clearing-houses,  where  it  was 
on  special  deposit,  to  the  banks,  where  it  would  be  ac- 
cessible to  business. 

Still  again,  the  provisions  for  transfers  to  meet  demand 
would  afford  a  better  distribution  of  the  money  than  is 
now  the  case. 

As  long  as  the  government  issues  notes  it  should  itself 
keep  the  reserve  on  which  they  are  based.  Hence,  the 
"greenback  reserve  "  should  remain  in  the  hands  of  the 
government.  Moreover  the  banks  could  not  be  allowed 
to  use  it,  and  therefore  would  not  want  it.  The  govern- 
ment should  either  protect  its  own  notes  or  withdraw 
them.  These  remarks  apply  to  coin  and  bullion  certifi- 
cates also. 

The  provisions  suggested  for  frequent  redemption,  and 
for  depriving  the  bank  notes  of  their  legal -tender  charac- 
ter in  payments  from  any  of  the  banks,  would,  together 
with  the  prohibition  of  interest  on  deposits,  accomplish  a 
threefold  purpose.     They  would  furnish   an  extra  safe- 


REORGANIZATION  OF   THE  BANKING  SYSTEM.    267 

guard  for  the  notes,  would  keep  the  volume  of  notes  al- 
ways close  to  the  demand  for  loans,  and  would  prevent 
a  congestion  of  money  at  great  money  centres  in  dull 
seasons. 

In  a  crisis  there  would  be  three  steps  for  the  enlarge- 
ment of  the  volume  of  currency,  which  would  serve  as 
successive  barriers  to  the  rise  of  a  feeling  of  panic  from 
a  dearth  of  money.  First,  the  banks  could  expand  their 
circulation  to  a  considerable  extent  while  yet  having  all 
reasonable  regard  for  the  safety  of  the  notes;  second, 
they  could  draw  to  a  certain  extent  on  their  reserves ; 
and,  third,  if  necessary,  clearing-house  certificates  could 
be  resorted  to,  as  now.  A  smaller  percentage  of  reserve 
would  be  necessary  for  each  bank  because  of  the  aboli- 
tion of  the  law  permitting  the  same  money  to  count  as 
reserve  for  two  banks  in  certain  cases.  The  abolition  of 
this  law  would  also  tend  to  prevent  congestion  of  money. 
And  the  reserve  should  be  available  in  a  stringency;  it 
is  of  the  very  nature  and  purpose  of  a  reserve  that  it 
should  be  used  to  allay  a  feeling  of  alarm;  and  the  fixing 
of  a  hard  and  fast  line,  below  which  the  banks  may  not 
go,  is  a  source  of  danger  when  the  reserves  fall  to  an 
amount  near  the  fixed  line.  Yet  it  would  be  undesirable 
to  remove  the  limit  altogether.  Hence  it  is  suggested 
that  it  be  lowered  in  crises. 

The  extra  notes  issued  during  a  crisis  could  not  become 
a  source  of  inflation,  because  the  provisions  made  would 
insure  their  retirement  within  a  short  time;  a  bank  would 
have  no  object  in  depositing  gold  for  the  sake  of  keeping 
out  an  equal  amount  of  notes. 

The  repeal  of  the  usury  laws  at  least  to  the  extent  sug- 
gested would  give  the  banks  a  further  control  over  the 
market  in  crises  from  the  use  of  a  variable  rate  of  dis- 


268  THE  INDEPENDENT  TREASURY. 

count.  This  power  would  also  serve  to  protect  our  gold 
balance  from  exportation. 

Provision  is  made  also  to  prevent  the  banks  from  get- 
ting too  large  a  profit  from  any  of  the  proposed  new  re- 
lations. Of  course  they  would  not  and  could  not  be 
expected  to  do  the  business  of  the  government  for  nothing, 
and  if  the  incidental  advantages  that  would  flow  from  the 
use  of  the  government  deposits  did  not  suffice  to  pay 
them  for  the  trouble  and  expense  of  managing  these  de- 
posits, they  would  have  to  get  direct  remuneration.  All 
that  can  be  fairly  asked  is  that  they  shall  not  receive  an 
undue  advantage.  The  spirit  of  prejudice  against  the 
banks  as  such  is  altogether  unreasonable  and  indefen- 
sible. 

If  the  government  should  enter  into  some  such  relations 
with  the  banks  as  have  been  outlined,  many  benefits 
would  accrue  to  it.  It  could  rely  on  the  banks  for  aid 
in  temporary  deficits;  it  would  have  a  ready  means  of 
raising  money  quickly  in  a  sudden  emergency;  it  would 
avoid  much  expense,  and  it  could  secure  more  convenient 
arrangements  for  the  collection  and  payment  of  its  dues, 
and  so  accommodate  the  public  in  their  relations  of  tax- 
payers and  public  creditors. 

Finally,  the  adoption  of  this,  or  some  similar  plan, 
would  put  an  end  to  the  injurious  influence  on  the  busi- 
ness of  the  country  which  the  action  of  the  Independent 
Treasury  has  so  long  exercised,  and  which  increases  as 
the  years  pass  by.  The  time  has  come  for  the  adoption 
of  a  more  enlightened  svsreno- 


APPENDIX. 


WORKS   CONSULTED. 

Adams,  H.  C.     Public  Debts. 

Andrews,  E.  B.  An  Honest  Dollar.  Am.  Econ.  Assoc. 
Public. 

Bancroft.  Geo.     Literary  and  Historical  Miscellanies. 
Bankers'  .Magazine. 

Bankers*  Association,  Proceedings  of  American. 
Benton.     Abridgment  of  Debates  of  Congress. 

Twenty  Years'  View. 

Block.     Dictionnaire  de  V Administration. 

Bolles.     Financial  History  of  the  United  States. 

Bradstreet's.     New  York. 

Colton.     Public  Economy. 

Commercial  and  Financial  Chronicle.     New  York. 

Democratic  Review. 

Dunbar.     Currency,  Finance,  and  Banking.     (Laws  of  U.  S.) 

Theory  and  History  of  Banking. 

Ferris.     Financial  Economy  of  the  United  States. 
Gibbons.     United  States  Debt  and  Taxation. 
Gilbart.     History  of  Banking  in  America. 

Gouge.  An  Inquiry  into  the  Expediency  of  Dispensing  with 
Bank  Agency  and  with  Bank  Paper  in  the  Fiscal  Concerns  of 
the  United  States. 

Government  Publications.  Executive  Documents  :  House 
and  Senate  Documents  and  Reports ;  Finance  Reports ;  Con- 
gressional Record,  etc. 

269 


270  A  Pr END  IX. 

Harper's  Magazine,  xliv.  481. 
Hunt's  Merchant's  Magazine. 
Independent,  The  New  York. 
Knox.     United  States  Notes. 
Lalor.     Encyclopedia  of  Political  Science. 
Lamphere.     United  States  Government. 
Lippincott's  Magazine,  December,  1873. 
Lodge.    Life  of  Daniel  Webster. 

Marquardsen,  H.     Handbuch  des  Oeffentlichen  Rechts  der 
Gegenwart. 

McLeod.     Principles  and  Practice  of  Banking. 

Mill.     Political  Economy. 

Niles1  Register. 

North  American  Review,  cxxxvii.  552. 

Palgrave.     Dictionary  of  Political  Economy. 

Penn  Monthly,  July,  1882. 

Plaindealer,  The  New  York. 

Pratt.    Digest  of  the  National  Bank  Act. 

Manual  of  Banking  Law. 

Rhodes'  Journal  of  Banking. 
Richardson.     The  National  Banks. 
Sargent.     Public  Men  and  Events. 
Schouler.     History  of  the  United  States. 
Statesman's  Manual. 
Story.     Commentaries  on  the  Constitution. 
Sumner.     Life  of  Jackson. 

History  of  American  Currency. 

Swain.     Life  and  Letters  of  Henry  Clay. 
Taussig.     Tariff  History  of  the  United  States. 

The  Silver  Situation.     Am.  Econ.  Assoc.  Public. 

Upton.     Money  in  Politics. 

United  States  Supreme  Court  Reports. 

Von  Holst.     Constitutional  History  of  the  United  States. 

Walker,  Francis  A.     Political  Economy. 

Money,  Trade,  and  Industry. 

Walker,  J.  H.     Money,  Trade,  and  Banking. 


APPENDIX.  271 


II. 

A. 

SUB-TREASURY   LAW,    AND   AMENDMENTS. 

"  An  Act  to  provide  for  the  better  organization  of  the  Treasury, 
and  for  the  collection,  safe-keeping,  transfer,  and  disburse- 
ment of  the  public  revenue." 

"  Whereas,  by  the  fourth  section  of  the  act  entitled  '  An  Act 
to  establish  the  Treasury  Department,'  approved  September  sec- 
ond, seventeen  hundred  and  eighty-nine,  it  was  provided  that  it 
should  be  the  duty  of  the  Treasurer  to  receive  and  keep  the 
moneys  of  the  United  States,  and  to  disburse  the  same  upon 
warrants  drawn  by  the  Secretary  of  the  Treasury,  countersigned 
by  the  Comptroller,  and  recorded  by  the  Register,  and  not 
otherwise ;  and  whereas  it  is  found  necessary  to  make  further 
provisions  to  enable  the  Treasurer  the  better  to  carry  into  effect 
the  intent  of  the  said  section,  in  relation  to  the  receiving  and  dis- 
bursing the  moneys  of  the  United  States,  Therefore  :  — 

Sec.  i  .  Be  it  enacted  by  Senate  and  House  of  Representatives 
of  the  United  States  of  America  in  Congress  Assembled,  That 
the  rooms  prepared  and  provided  in  the  new  Treasury  building 
at  the  seat  of  Government  for  the  use  of  the  Treasurer  of  the 
United  States,  his  assistants  and  clerks,  and  occupied  by  them, 
and  also  the  fire-proof  vaults  and  safes  erected  in  said  rooms  for 
the  keeping  of  the  public  moneys  in  the  possession  and  under 
the  immediate  control  of  said  Treasurer,  and  such  other  apart- 
ments as  are  provided  for  by  this  act  as  places  of  deposit  of  the 
public  money,  are  hereby  constituted,  and  declared  to  be, 
the  Treasury  of  the  United  States.     And  all  moneys  paid  into 


272  APPENDIX. 

the  same  shall  be  subject  to  the  draft  of  the  Treasurer,  drawn 
agreeably  to  appropriations  made  by  law. 

Sec.  2.  And  be  it  further  enacted,  That  the  mint  of  the 
United  States,  in  the  city  of  Philadelphia,  in  the  State  of  Penn- 
sylvania, and  the  branch  mint  in  the  city  of  New  Orleans,  in  the 
State  of  Louisiana,  and  the  vaults  and  safes  thereof  respectively, 
shall  be  places  of  deposit  and  safe-keeping  of  the  public  moneys 
at  these  points  respectively ;  and  the  treasurers  of  the  said  mint 
and  branch  mint  respectively,  for  the  time  being,  shall  be  assist- 
ant treasurers  under  the  provisions  of  this  act,  and  shall  have 
the  custody  and  care  of  all  public  moneys  deposited  within  the 
same,  and  shall  perform  all  the  duties  required  to  be  performed 
by  them,  in  reference  to  the  receipt,  safe-keeping,  transfer,  and 
disbursement  of  all  such  moneys,  according  to  the  provisions 
hereinafter  contained. 

Sec.  3.  And  be  it  further  enacted,  That  the  rooms  which  were 
directed  to  be  prepared  and  provided  within  the  custom-houses 
in  the  city  of  New  York,  in  the  State  of  New  York,  and  in  the 
city  of  Boston,  in  the  State  of  Massachusetts,  for  the  use  of 
receivers-general  of  public  moneys,  under  the  provisions  of  the 
act  entitled,  "An  Act  to  provide  for  the  collection,  safe-keep- 
ing, transfer,  and  disbursement  of  the  public  revenue,"  approved 
July  fourth,  eighteen  hundred  and  forty,  shall  be  for  the  use  of 
the  assistant  treasurers  hereinafter  directed  to  be  appointed  at 
those  places,  respectively ;  as  shall  be  also  the  fire-proof  vaults 
and  safes  prepared  and  provided  within  said  rooms  for  the  keep- 
ing of  the  public  moneys  collected  and  deposited  with  them, 
respectively ;  and  the  Assistant  Treasurers  from  time  to  time 
appointed  at  those  points,  shall  have  the  custody  and  care  of 
the  said  rooms,  vaults,  and  safes,  respectively,  and  of  all  the 
public  moneys  deposited  within  the  same,  and  shall  perform  all 
the  duties  required  to  be  performed  by  them,  in  reference  to  the 
receipt,  safe-keeping,  transfer,  and  disbursement  of  all  such 
moneys,  according  to  the  provisions  of  this  act. 

Sec.  4.  And  be  it  further  enacted,  That  the  offices,  with  suit- 
able and  convenient  rooms,  which  were  directed  to  be  erected, 


APPENDIX.  273 

prepared,  and  provided  for  the  use  of  receivers-general  of  public 
money,  at  the  expense  of  the  United  States,  at  the  city  of 
Charleston,  in  the  State  of  South  Carolina,  and  at  the  city  of  St. 
Louis,  in  the  State  of  Missouri,  under  the  act  entitled,  "  An 
Act  to  provide  for  the  collection,  safe-keeping,  transfer,  and  dis- 
bursement of  the  public  revenue,'1  approved  July  fourth,  eigh- 
teen hundred  and  forty,  shall  be  for  the  use  of  the  assistant 
treasurers  hereinafter  directed  to  be  appointed  at  the  places 
above  named ;  as  shall  be  also  the  fire-proof  vaults  and  safes 
erected  within  the  said  offices  and  rooms  for  the  keeping  of  the 
public  money  collected  and  deposited  at  those  points,  respect- 
ively :  and  the  said  assistant  treasurers  from  time  to  time  ap- 
pointed at  those  places,  shall  have  the  custody  and  care  of  the 
said  offices,  vaults,  and  safes,  erected,  prepared,  and  provided 
as  aforesaid,  and  of  all  the  public  moneys  deposited  within  the 
same,  and  shall  perform  all  the  duties  required  to  be  performed 
by  them,  in  reference  to  the  receipt,  safe-keeping,  transfer,  and 
disbursement  of  all  such  moneys,  according  to  the  provisions 
hereinafter  contained. 

Sec.  5.  And  be  it  further  enacted,  That  the  President  shall 
nominate,  and,  by  and  with  the  advice  and  consent  of  the  Sen- 
ate, appoint  four  officers,  to  be  denominated  "  assistant  treas- 
urers of  the  United  States/"  which  said  officers  shall  hold  their 
respective  offices  for  the  term  of  four  years,  unless  sooner 
removed  therefrom ;  one  of  which  shall  be  located  at  the  city  of 
Xew  York,  in  the  State  of  New  York  ;  one  other  of  which  shall 
be  located  at  the  city  of  Boston,  in  the  State  of  Massachusetts ; 
one  other  of  which  shall  be  located  at  the  city  of  Charleston,  in 
the  State  of  South  Carolina;  and  one  other  at  St.  Louis,  in  the 
State  of  Missouri ;  and  all  of  which  said  officers  shall  give  bonds 
to  the  United  States,  with  security  according  to  the  provisions 
hereinafter  contained,  for  the  faithful  discharge  of  the  duties  of 
their  respective  offices. 

Sf.c.  6.  And  be  it  further  enacted.  That  the  Treasurer  of 
the  United  States,  the  Treasurer  of  the  mint  of  the  United 
States,  the  treasurers,  and  those  acting  as  such,  of  the  various 


274  APPENDIX. 

branch  mints,  all  collectors  of  the  customs,  all  surveyors  of  the 
customs  acting  also  as  collectors,  all  assistant  treasurers,  all 
receivers  of  public  moneys  at  the  several  land  offices,  all  post- 
masters, and  all  public  officers  of  whatsoever  character  be,  and 
they  are  hereby,  required  to  keep  safely,  without  loaning,  using, 
depositing  in  banks,  or  exchanging  for  other  funds  than  as 
allowed  by  this  act,  all  the  public  money  collected  by  them,  or 
otherwise  at  any  time  placed  in  their  possession  and  custody,  till 
the  same  is  ordered  by  the  proper  department  or  officer  of  the 
Government,  to  be  transferred  or  paid  out ;  and  when  such 
orders  for  transfer  or  payment  are  received,  faithfully  and 
promptly  to  make  the  same  as  directed,  and  to  do  and  perform 
all  other  duties  as  fiscal  agents  of  the  Government  which  may 
be  imposed  by  this  or  any  other  acts  of  Congress,  or  by  any 
regulation  of  the  Treasury  Department  made  in  conformity  to 
law ;  and,  also,  to  do  and  perform  all  acts  and  duties  required 
by  law,  or  by  direction  of  any  of  the  Executive  Departments  of 
the  Government,  as  agents  for  paying  pensions,  or  for  making 
any  other  disbursements  which  either  of  the  heads  of  those 
Departments  may  be  required  by  law  to  make,  and  which  are  of 
a  character  to  be  made  by  the  depositaries  hereby  constituted, 
consistently  with  the  official  duties  imposed  upon  them. 

Sec.  7.  And  be  it 'further  enacted,  That  the  Treasurer  of  the 
United  States,  the  Treasurer  of  the  mint  of  the  United  States, 
the  Treasurer  of  the  branch  mint  at  New  Orleans,  and  all  the 
assistant  treasurers  hereinbefore  directed  to  be  appointed,  shall 
respectively  give  bonds  to  the  United  States  faithfully  to  discharge 
the  duties  of  their  respective  offices  according  to  law  and  for 
such  amounts  as  shall  be  directed  by  the  Secretary  of  the 
Treasury,  with  sureties  to  the  satisfaction  of  the  Solicitor  of 
the  Treasury;  and  shall,  from  time  to  time,  renew,  strengthen, 
and  increase  their  official  bonds,  as  the.  Secretary  of  the  Treas- 
ury may  direct,  any  law  in  reference  to  any  of  the  official  bonds 
of  any  of  the  said  officers  to  the  contrary  notwithstanding. 

Sec.  8.  A /id  be  it  further  enacted,  That  it  shall  be  the  duty 
of  the  Secretary  of  the  Treasurv,  at  as  early  a  date  as  possible 


APPENDIX.  2/5 

after  the  passage  of  this  act,  to  require  the  several  depositaries 
hereby  constituted,  and  whose  official  bonds  are  not  hereinbe- 
fore provided  for,  to  execute  bonds,  new  and  suitable  in  their 
terms,  to  meet  the  new  and  increased  duties  imposed  upon  them 
respectively,  by  this  act,  and  with  sureties,  and  in  sums  such  as 
shall  seem  reasonable  and  safe  to  the  Solicitor  of  the  Treasury ; 
and,  from  time  to  time,  to  require  such  bonds  to  be  renewed 
and  increased  in  amount,  and  strengthened  by  new  sureties,  to 
meet  any  increasing  responsibility  which  may  grow  out  of  accu- 
mulations of  money  in  the  hands  of  the  depositary,  or  out  of 
any  other  duty  or  responsibility  arising  under  this  or  any  other 
law  of  Congress. 

Sec.  9.  And  be  it  further  enacted,  That  all  collectors  and 
receivers  of  public  money,  of  every  character  and  description, 
within  the  District  of  Columbia,  shall,  as  frequently  as  they  may 
be  directed  by  the  Secretary  of  the  Treasury  or  the  Postmaster- 
( reneral  so  to  do,  pay  over  to  the  Treasurer  of  the  United  States, 
at  the  Treasury,  all  the  public  moneys  collected  by  them,  or  in 
their  hands ;  that  all  such  collectors  and  receivers  of  public 
moneys  within  the  cities  of  Philadelphia  and  New  Orleans,  shall, 
upon  the  same  direction,  pay  over  to  the  Treasurers  of  the 
mints  in  their  respective  cities,  at  the  said  mints,  all  public 
moneys  collected  by  them,  or  in  their  hands;  and  that  all  such 
collectors  and  receivers  of  public  moneys  within  the  cities  of 
New  York,  Boston,  Charleston,  and  St.  Louis,  shall,  upon  the 
same  direction,  pay  over  to  the  assistant  treasurers  in  their 
respective  cities,  at  their  offices,  respectively,  all  the  public 
moneys  collected  by  them,  or  in  their  hands,  to  be  safely  kept 
by  the  said  respective  depositaries  until  otherwise  disposed  of 
according  to  law :  and  it  shall  be  the  duty  of  said  Secretary  and 
Postmaster-General,  respectively,  to  direct  such  payments  by 
the  said  collectors  and  receivers  at  all  the  said  places  at  least  as 
often  as  one  in  each  week,  and  as  much  more  frequently,  and  in 
all  cases,  as  they  in  their  discretion  may  think  proper. 

Sfx.  10.  And  be  it  further  enacted,  That  it  shall  be  lawful 
for  the  Secretary  of  the  Treasury  to  transfer  the  moneys  in  the 


2j6  APPENDIX. 

hands  of  any  depositary  hereby  constituted  to  the  Treasury  of 
the  United  States,  to  be  there  safely  kept,  to  the  credit  of  the 
Treasurer  of  the  United  States,  according  to  the  provisions  of 
this  act,  to  any  other  depositary  constituted  by  the  same,  at  his 
discretion,  and  as  the  safety  of  the  public  moneys  and  the  con- 
venience of  the  public  service  shall  seem  to  him  to  require  ;  which 
authority  to  transfer  the  moneys  belonging  to  the  Post-Office 
Department  is  also  hereby  conferred  upon  the  Postmaster-Gen- 
eral so  far  as  its  exercise  by  him  may  be  consistent  with  the  pro- 
visions of  existing  laws ;  and  every  depositary  constituted  by 
this  act  shall  keep  his  account  of  the  money  paid  to  or  deposited 
with  him,  belonging  to  the  Post-Office  Department,  separate  and 
distinct  from  the  account  kept  by  him  of  other  public  moneys  so 
paid  or  deposited.  And  for  the  purpose  of  payments  on  the 
public  account,  it  shall  be  lawful  for  the  Treasurer  of  the  United 
States  to  draw  upon  any  of  the  said  depositaries,  as  he  may 
think  most  conducive  to  the  public  interests,  or  the  convenience 
of  the  public  creditors,  or  both  ;  and  each  depositary  so  drawn 
upon  shall  make  returns  to  the  Treasury  and  Post-Office  De- 
partments of  all  moneys  received  and  paid  by  him  at  such  times 
and  in  such  form  as  shall  be  directed  by  the  Secretary  of  the 
Treasury  or  the  Postmaster-General. 

Sec.  ii.  And  be  it  further  enacted,  That  the  Secretary  of 
the  Treasury  shall  be,  and  he  is  hereby  authorized,  to  cause  ex- 
aminations to  be  made  of  the  books,  accounts,  and  money  on 
hand,  of  the  several  depositaries  constituted  by  this  act ;  and  for 
that  purpose  to  appoint  special  agents,  as  occasion  may  require, 
with  such  compensation,  not  exceeding  six  dollars  per  day  and 
travelling  expenses,  as  he  may  think  reasonable,  to  be  fixed  and 
declared  at  the  time  of  each  appointment.  The  agents  selected 
to  make  these  examinations  shall  be  instructed  to  examine  as 
well  the  book,  accounts,  and  returns  of  the  officer,  as  the  money 
on  hand,  and  the  manner  of  its  being  kept,  to  the  end  that  uni- 
formity and  accuracy  in  the  accounts,  as  well  as  safety  to  the 
public  moneys,  may  be  secured  thereby. 

Sec.  12.  And  be  it  further  enacted,  That  in  addition  to  the 


APPENDIX.  277 

examinations  provided  for  in  the  last  preceding  section,  and  as 
a  further  guard  over  the  public  moneys,  it  shall  be  the  duty  of 
each  naval  officer  and  surveyor,  as  a  check  upon  the  assistant 
treasurers,  or  the  collectors  of  the  customs,  of  their  respective 
districts ;  of  each  register  of  a  land  office,  as  a  check  upon  the 
receiver  of  his  land  office;  and  of  the  director  and  superintend- 
ent of  each  mint  and  branch  mint,  when  separate  officers,  as  a 
check  upon  the  treasurers  respectively,  of  the  said  mints,  or  the 
persons  acting  as  such,  at  the  close  of  each  quarter  of  the  year, 
and  as  much  more  frequently  as  they  shall  be  directed  by  the 
Secretary  of  the  Treasury  to  do  so,  to  examine  the  books,  ac- 
counts, returns,  and  money  on  hand  of  the  assistant  treasurers, 
collectors,  receivers  of  land  offices,  treasurers  of  the  mint,  and 
each  branch  mint,  and  persons  acting  as  such  ;  and  to  make  a 
full,  accurate,  and  faithful  return  to  the  Treasury  Department  of 
their  condition. 

Sec.  13.  And  be  it  further  enacted,  That  the  said  officers, 
respectively,  whose  duty  it  is  made  by  this  act  to  receive,  keep, 
and  disburse  the  public  moneys,  as  the  fiscal  agents  of  the  Gov- 
ernment, may  be  allowed  any  necessary  additional  expense  for 
clerks,  fire-proof  chests  or  vaults,  or  other  necessary  expenses  of 
safe-keeping,  transferring,  and  disbursing  said  moneys  ;  all  such 
expense  of  every  character  to  be  first  expressly  authorized  by  the 
Secretary  of  the  Treasury,  whose  directions  upon  all  the  above 
subjects,  by  way  of  regulation  and  otherwise,  so  far  as  authorized 
by  law,  are  to  be  strictly  followed  by  all  the  said  officers :  Pro- 
vided, That  the  whole  number  of  clerks  to  be  appointed  by  vir- 
tue of  this  section  of  this  act  shall  not  exceed  ten ;  and  that  the 
aggregate  compensations  of  the  whole  number  shall  not  exceed 
eight  thousand  dollars  ;  nor  shall  the  compensation  of  any  one 
clerk  so  appointed  exceed  eight  hundred  dollars  per  annum. 

Sec.  14.  And  be  it  further  enacted,  That  the  Secretary  of  the 
Treasury  may,  at  his  discretion,  transfer  the  balances  remaining 
with  any  of  the  present  depositaries,  to  any  other  of  the 
present  depositaries,  as  he  may  deem  the  safety  of  the  pub- 
lic    money   or    the    public    convenience    may    require:     Pro- 


278  APPENDIX. 

vided,  That  nothing  in  this  act  shall  be  so  construed  as  to 
authorize  the  Secretary  of  the  Treasury  to  transfer  the  balances 
remaining  with  any  of  the  present  depositaries  to  the  depositaries 
constituted  by  this  act,  before  the  first  day  of  January  next. 
And  provided,  That  for  the  purpose  of  payments  on  public  ac- 
count, out  of  balances  remaining  with  the  present  depositaries, 
it  shall  be  lawful  for  the  Treasurer  of  the  United  States  to  draw 
upon  any  of  the  said  depositaries,  as  he  may  think  most  condu- 
cive to  the  public  interests,  or  to  the  convenience  of  public  cred- 
itors, or  both. 

Sec.  15.  And  be  it  further  enacted,  That  all  marshals,  district 
attorneys,  and  others  having  public  money  to  pay  to  the  United 
States,  and  all  patentees  wishing  to  make  payment  for  patents 
to  be  issued,  may  pay  all  such  moneys  to  the  Treasurer  of  the 
United  States,  to  the  treasurer  of  either  of  the  mints  in  Phila- 
delphia or  New  Orleans,  to  either  of  the  other  assistant  treas- 
urers, or  to  such  other  depositary  constituted  by  this  act  as  shall 
be  designated  by  the  Secretary  of  the  Treasury  in  other  parts  of 
the  United  States,  to  receive  such  payments  and  give  receipts  or 
certificates  of  deposit  therefor. 

Sec.  16.  And  be  it  further  enacted,  That  all  officers  and 
other  persons  charged  by  this  act,  or  any  other  act,  with  the 
safe-keeping,  transfer,  and  disbursement  of  the  public  moneys, 
other  than  those  connected  with  the  Post-Office  Department,  are 
hereby  required  to  keep  an  accurate  entry  of  each  sum  received, 
and  each  payment  or  transfer ;  and  that  if  any  one  of  the  said 
officers  or  those  connected  with  the  Post-Office  Department 
shall  convert  to  his  own  use  in  any  way  whatever,  or  shall  use, 
by  way  of  investment  in  any  kind  of  property  or  merchandise, 
or  shall  loan,  with  or  without  interest,  or  shall  desposit  in  any 
bank,  or  shall  exchange  for  other  funds  except  as  allowed  by  this 
act,  any  portion  of  the  public  moneys  intrusted  to  him  for  safe- 
keeping, disbursement,  transfer,  or  for  any  other  purpose,  every 
such  act  shall  be  deemed  and  adjudged  to  be  an  embezzlement 
of  so  much  of  the  said  moneys  as  shall  be  thus  taken,  converted, 
invested,  used,  loaned,  deposited,  or  exchanged,  which  is  hereby 


APPENDIX.  279 

declared  to  be  a  felony  ;  and  any  failure  to  pay  over  or  to  produce 
the  public  moneys  intrusted  to  such  person  shall  be  held  and 
taken  to  be  prima  facie  evidence  of  such  embezzlement,  and  if 
any  officer  charged  with  the  disbursements  of  public  money  shall 
accept  or  receive,  or  transmit  to  the  Treasury  Department  to  be 
allowed  in  his  favor,  any  receipt  or  voucher  from  a  creditor  of 
United  States  without  having  paid  to  such  creditor  in  such  funds 
as  the  said  officer  may  have  received  for  disbursement,  or  such 
funds  as  he  may  be  authorized  by  this  act  to  take  in  exchange, 
the  full  amount  specified  in  such  receipt  or  voucher,  every  such 
act  shall  be  deemed  to  be  a  conversion  by  such  officer  to  his  own 
use  of  the  amount  specified  in  such  receipt  or  voucher ;  and  any 
officer  or  agent  of  the  United  States,  and  all  persons  advising  or 
participating  in  such  act,  being  convicted  thereof  before  any 
court  of  the  United  States  of  competent  jurisdiction,  shall  be 
sentenced  to  imprisonment  for  a  term  of  not  less  than  six  months 
nor  more  than  ten  years,  and  to  a  fine  equal  to  the  amount  of  the 
money  embezzled.  And  upon  the  trial  of  any  indictment  against 
any  person  for  embezzling  public  money  under  the  provisions  of 
this  act,  it  shall  be  sufficient  evidence,  for  the  purpose  of  show- 
ing a  balance  against  such  person,  to  produce  a  transcript  from 
the  books  and  proceedings  of  the  Treasury,  as  required  in  civil 
cases,  under  provisions  of  the  act  entitled,  "  An  Act  to  provide 
more  effectually  for  the  settlement  of  accounts  between  the 
United  States  and  receivers  of  public  money,"  approved  March 
third,  one  thousand  seven  hundred  and  ninety  seven ;  and  the 
provisions  of  this  act  shall  be  so  construed  as  to  apply  to  all 
persons  charged  with  the  safe-keeping,  transfer,  or  disbursement 
of  the  public  money,  whether  sucli  persons  be  indicted  as  re- 
ceivers or  depositaries  of  the  same  :  and  the  refusal  of  such 
person,  whether  in  or  out  of  office,  to  pay  any  draft,  order,  or 
warrant,  which  may  be  drawn  upon  him  by  the  proper  officer  of 
the  Treasury  Department,  for  any  public  money  in  his  hands 
belonging  to  the  United  States,  no  matter  in  what  capacity  the 
same  may  have  been  received  or  may  be  held,  or  to  transfer  or 
disburse  any  such  money  promptly,  upon  the  legal  requirement 


28o  APPENDIX. 

of  any  authorized  officer  of  the  United  States,  shall  bedeemed  and 
taken,  upon  the  trial  of  any  indictment  against  such  person  for 
embezzlement,  as  prima  facie  evidence  of  such  embezzlement. 

Sec.  17.  And  be  it  further  enacted,  That  until  the  rooms, 
offices,  vaults,  and  safes,  directed  by  the  first  four  sections  of 
this  act  to  be  constructed  and  prepared  for  the  use  of  the  Treas- 
urer of  the  United  States,  the  treasurers  of  the  mints  at  Phila- 
delphia and  New  Orleans,  and  the  assistant  treasurers  at  New 
York,  Boston,  Charleston,  and  St.  Louis,  can  be  constructed 
and  prepared  for  use,  it  shall  be  the  duty  of  the  Secretary  of  the 
Treasury  to  procure  suitable  rooms  for  offices  for  those  officers 
at  their  respective  locations,  and  to  contract  for  such  use  of 
vaults  and  safes  as  may  be  required  for  the  safe-keeping  of  the 
public  moneys  in  the  charge  and  custody  of  those  officers,  re- 
spectively t  the  expenses  to  be  paid  by  the  United  States. 

And  whereas  by  the  thirteenth  section  of  the  act  entitled, 
"An  Act  to  regulate  the  collection  of  duties  imposed  by  law  on 
the  tonnage  of  ships  or  vessels,  and  on  goods,  wares,  and  mer- 
chandises imported  into  the  United  States,"  approved  July 
thirty-one,  seventeen  hundred  and  eighty-nine,  it  was  provided 
that  all  fees  and  dues  collected  by  virtue  of  that  act  should  be 
received  in  gold  and  silver  coin  only ;  and  whereas,  also,  by  the 
fifth  section  of  the  act  approved  May  ten,  eighteen  hundred, 
entitled,  "  An  Act  to  amend  the  Act  entitled,  '  An  Act  providing 
for  the  sale  of  the  lands  of  the  United  States  in  the  territory 
north-west  of  the  Ohio,  and  above  the  mouth  of  Kentucky 
River,' "  it  was  provided  that  payment  for  the  said  lands  shall 
be  made  by  all  purchasers  in  specie,  or  in  evidences  of  the  public 
debt ;  and  whereas  experience  has  proved  that  said  provisions 
ought  to  be  revived  and  enforced,  according  to  the  true  and  wise 
intent  of  the  Constitution  of  the  United  States  :  — 

Sec.  18.  Be  it  further  enacted,  That  on  the  first  day  of  Janu- 
ary, in  the  year  one  thousand  eight  hundred  and  forty-seven, 
and  thereafter,  all  duties,  taxes,  sales  of  public  lands,  debts,  and 
sums  of  money  accruing  or  becoming  due  to  the  United  States, 
and  also  all  sums  due  for  postages,  or  otherwise,  to  the.  General 


APPENDIX.  28 1 

Post-Office  Department,  shall  be  paid  in  gold  and  silver  coin 
only,  or  in  Treasury  notes  issued  under  the  authority  of  the 
United  States :  Provided,  That  the  Secretary  of  the  Treasury 
shall  publish,  monthly,  in  two  newspapers  at  the  city  of  Wash- 
ington, the  amount  of  specie  at  the  several  places  of  deposit, 
the  amount  of  Treasury  notes  or  drafts  issued,  and  the  amount 
outstanding  on  the  last  day  of  each  month. 

Sec.  19.  And  be  it  further  enacted.  That  on  the  first  day  of 
April,  one  thousand  eight  hundred  and  forty-seven,  and  there- 
after, every  officer  or  agent  engaged  in  making  disbursements  on 
account  of  the  United  States,  or  of  the  General  Post-Office,  shall 
make  all  payments  in  gold  and  silver  coin  or  in  Treasury  notes, 
if  the  creditor  agree  to  receive  said  notes  in  payment ;  and  any 
receiving  or  disbursing  officer  or  agent  who  shall  neglect,  evade, 
or  violate,  the  provisions  of  this  and  the  last  preceding  section 
of  this  act,  shall,  by  the  Secretary  of  the  Treasury,  be  immedi- 
ately reported  to  the  President  of  the  United  States,  with  the 
facts  of  such  neglect,  evasion,  or  violation  ;  and  also  to  Congress, 
if  in  session,  and  if  not  in  session,  at  the  commencement  of  its 
session  next  after  the  violation  takes  place. 

Sec.  20.  And  be  it  further  enacted,  That  no  exchange  of 
funds  shall  be  made  by  any  disbursing  officers  or  agents  of  the 
Government,  of  any  grade  or  denomination  whatsoever,  or  con- 
nected with  any  branch  of  the  public  service,  other  than  an 
exchange  for  gold  and  silver ;  and  every  such  disbursing  officer, 
when  the  means  for  his  disbursements  are  furnished  to  him  in 
gold  and  silver,  shall  make  his  payments  in  the  money  so  fur- 
nished :  or  when  those  means  are  furnished  to  him  in  drafts, 
shall  cause  those  drafts  to  be  presented  at  their  place  of  pay- 
ment, and  properly  paid,  according  to  the  law ;  and  shall  make 
his  payments  in  the  money  so  received  for  the  drafts  furnished, 
unless,  in  either  case,  he  can  exchange  the  means  in  his  hands 
for  gold  and  silver  at  par.  And  it  shall  be,  and  is  hereby,  made 
the  duty  of  the  head  of  the  proper  department  immediately  to 
suspend  from  duty  any  disbursing  officer  who  shall  violate  the 
provisions  of  this  section,  and  forthwith  to  report  the  name  of 


282  APPENDIX. 

the  officer  or  agent  to  the  President,  with  the  fact  of  the  viola- 
tion, and  all  the  circumstances  accompanying  the  same  and 
within  the  knowledge  of  the  said  Secretary,  to  the  end  that  such 
officer  or  agent  may  be  promptly  removed  from  office  or  restored 
to  his  trust  and  the  performance  of  his  duties,  as  to  the  Presi- 
dent may  seem  just  and  proper :  Provided,  however,  That  those 
disbursing  officers  having  at  present  credits  in  the  banks,  shall, 
until  the  first  day  of  January  next,  be  allowed  to  check  on  the 
same,  allowing  the  public  creditors  to  receive  their  pay  from  the 
banks  either  in  specie  or  bank  notes. 

Sec.  21.  And  it  be  further  enacted,  That  it  shall  be  the  duty 
of  the  Secretary  of  the  Treasury  to  issue  and  publish  regulations 
to  enforce  the  speedy  presentation  of  all  Government  drafts  for 
payment  at  the  place  where  payable,  and  to  prescribe  the  time, 
according  to  the  different  distances  of  the  depositaries  from  the 
seat  of  Government,  within  which  all  drafts  upon  them,  respect- 
ively, shall  be  presented  for  payment ;  and  in  default  of  such 
presentation,  to  direct  any  other  mode  and  place  of  payment 
which  he  may  deem  proper ;  but  in  all  these  regulations  and 
directions  it  shall  be  the  duty  of  the  Secretary  of  the  Treasury, 
to  guard  as  far  as  may  be,  against  those  drafts  being  used  or 
thrown  into  circulation  as  a  paper  currency,  or  medium  of 
exchange.  And  no  officer  of  the  United  States  shall,  either 
directly  or  indirectly,  sell  or  dispose  to  any  person  or  persons, 
or  corporations,  whatsoever,  for  a  premium,  any  Treasury  note, 
draft,  warrant,  or  other  public  security,  not  his  private  property, 
or  sell  or  dispose  of  the  avails  or  proceeds  of  such  note,  draft, 
warrant,  or  security,  in  his  hands  for  disbursement,  without 
making  return  of  such  premium,  and  accounting  therefor  by 
charging  the  same  in  his  accounts  to  the  credit  of  the  United 
States  ;  and  any  officer  violating  this  section  shall  be  forthwith 
dismissed  from  office. 

Sec.  22.  And  be  it  further  enacted,  That  the  assistant 
treasurers  directed  by  this  act  to  be  appointed,  shall  receive, 
respectively,  the  following  salaries  per  annum,  to  be  paid  quar- 
ter-yearly at  the  Treasury  of  the  United  States ;    to   wit :    the 


APPENDIX.  283 

Assistant  Treasurer  at  New  York  shall  be  paid  a  salary  of  four 
thousand  dollars  per  annum  ;  the  Assistant  Treasurer  at  Boston 
shall  be  paid  a  salary  of  two  thousand  five  hundred  dollaes  per 
annum  ;  the  Assistant  Treasurer  at  Charleston  shall  be  paid  a 
salary  of  two  thousand  five  hundred  dollars  per  annum  ;  the 
Assistant  Treasurer  at  St.  Louis  shall  be  paid  a  salary  of  t\$p 
thousand  five  hundred  dollars  per  annum ;  the  Treasurer  of 
the  mint  at  Philadelphia  shall,  in  addition  to  his  present  salary, 
receive  five  hundred  dollars  annually  for  the  performance  of  the 
duties  imposed  by  this  act ;  the  Treasurer  of  the  branch  mint  at 
New  Orleans  shall  also  receive  five  hundred  dollars  annually  for 
the  additional  duties  created  by  this  act ;  and  these  salaries, 
respectively,  shall  be  in  full  for  the  services  of  the  respective 
officers,  nor  shall  either  of  them  be  permitted  to  charge  or 
receive  any  commission,  pay,  or  perquisite,  for  any  official  ser- 
vice, of  any  character  or  description  whatsoever ;  and  the 
making  of  any  such  charge,  or  the  receipt  of  any  such  compen- 
sation, is  hereby  declared  to  be  a  misdemeanor,  for  which  the 
officer,  convicted  thereof  before  any  court  of  the  United  States 
of  competent  jurisdiction,  shall  be  subject  to  punishment  by  fine 
or  imprisonment,  or  both,  at  the  discretion  of  the  court  before 
which  the  offence  shall  be  tried. 

Sec.  23.  And  it  be  further  enacted,  That  there  shall  be,  and 
hereby  is,  appropriated  to  be  paid  out  of  any  money  in  the 
Treasury  not  otherwise  appropriated,  the  sum  of  five  thousand 
dollars,  to  be  expended,  under  the  direction  of  the  Secretary  of 
the  Treasury,  in  such  repairs  or  additions  as  may  be  necessarv 
to  put  in  good  condition  for  use,  with  as  little  delay  as  may  lie 
consistent  with  the  public  interests,  the  offices,  rooms,  vaults, 
and  safes  herein  mentioned,  and  in  the  purchase  of  any  neces- 
sary additional  furniture  and  fixtures,  in  the  purchase  of  neces- 
sary books  and  stationery,  and  in  defraying  any  other  incidental 
expenses  necessary  to  carry  this  act  into  effect. 

Sec.  24.  And  be  it  further  enacted,  That  all  acts  or  parts  of 
acts  which  come  in  conflict  with  the  provisions  of  this  act  be, 
and  the  same  are  hereby,  repealed. 

Approved,  August  6,  1846. 


284  APPENDIX. 

B. 

AMENDMENTS   TO   SUB-TREASURY   ACT. 

MARCH    3,    1857. 

Sec.  1.  Be  it  enacted,  etc.,  That  the  act  to  provide  for  the 
better  organization  of  the  Treasury,  and  for  the  collection, 
safe-keeping,  transfer,  and  disbursement  of  the  public  revenue, 
approved  August  sixth,  eighteen  hundred  and  forty-six,  be,  and 
the  same  is  hereby  so  amended  that  each  and  every  disbursing 
officer  or  agent  of  the  United  States,  having  any  money  of  the 
United  States  intrusted  to  him  for  disbursement,  shall  be,  and 
he  is  hereby  required  to  deposit  the  same  with  the  Treasurer  of 
the  United  States,  or  with  some  one  of  the  assistant  treasurers 
or  public  depositaries,  and  draw  for  the  same  only  in  favor  of 
the  persons  to  whom  payment  is  to  be  made  in  pursuance  of  law 
and  instructions  ;  except  when  payments  are  to  be  made  in  sums 
under  twenty  dollars,  in  which  cases  such  disbursing  agent  may 
check  in  his  own  name,  stating  that  it  is  to  pay  small  claims. 

Sec.  2.  And  be  it  further  enacted,  That  the  Treasurer  of  the 
United  States,  assistant  treasurers,  and  public  depositaries  shall 
safely  keep  all  moneys  deposited  by  any  disbursing  officer  or 
disbursing  agent  of  the  United  States,  as  well  as  any  moneys 
deposited  by  any  receiver,  collector,  or  other  person  which  shall 
be  the  moneys  of,  or  due,  or  owing  to  the  United  States,  and  for 
a  failure  so  to  do  shall  be  held  guilty  of  the  crime  of  embezzle- 
ment of  said  moneys,  and  subject  to  the  punishment  provided 
for  embezzlement  in  the  act  to  which  this  is  an  amendment. 

Sec.  3.  And  be  it  further  enacted.  That  it  shall  be  the  duty 
of  each  and  every  person  who  shall  have  moneys  of  the  United 
States  in  his  hands  or  possession  to  pay  the  same  to  the  Treas- 
urer, the  assistant  treasurer, or  a  public  depositary  of  the  United 
States,  and  take  his  receipt  for  the  same,  in  duplicate,  and  for- 
ward one  of  them  forthwith  to  the  Secretary  of  the  Treasury, 
and  for  a  failure  to  make  such  deposit,  when  required  by  the 


APPENDIX.  285 

Secretary  of  the  Treasury,  or  any  other  department,  or  the 
accounting  officers  of  the  Treasury,  the  person  so  failing  shall 
be  held  guilty  of  the  crime  of  embezzlement,  and  subject  to  the 
punishment  for  that  offence  provided  in  the  act  to  which  this  is 
an  amendment. 


DEPOSITORIES. 

[SECTION   32I I    OF    REVISED    STATUTES.] 

The  Secretary  of  the  Treasury  is  authorized  to  designate  one 
or  more  depositories  in  each  State,  for  the  deposit  and  safe- 
keeping of  the  money  collected  by  virtue  of  the  internal-revenue 
laws ;  and  the  receipt  of  the  proper  officer  of  such  depository  to 
a  collector  for  the  money  deposited  by  him  shall  be  a  sufficient 
voucher  for  such  collector  in  the  settlement  of  his  accounts  at 
the  Treasury  Department. 


D. 

DEPOSITS   OF   POSTMASTERS. 

[SECTION   3847   OF   REVISED   STATUTES.] 

Any  postmaster,  having  public  money  belonging  to  the  Gov- 
ernment, at  an  office  within  a  county  where  there  are  no  desig- 
nated depositaries,  treasurers  of  mints,  or  Treasurer,  or  assistant 
treasurers  of  the  United  States,  may  deposit  the  same  at  his  own 
risk  and  in  his  official  capacity,  in  any  national  bank  in  the 
town,  city,  or  county  where  the  said  postmaster  resides,  etc. 


286  APPENDIX. 

E. 

TRANSFERS   OF   POST-OFFICE   MONEY. 

[SECTION   3641    OF   REVISED   STATUTES.] 

The  Postmaster-General  may  transfer  money  belonging  to  the 
postal  service  between  the  Treasurer,  assistant  treasurers,  and 
designated  depositaries,  at  his  discretion,  and  as  the  safety  of 
the  public  money  and  the  convenience  of  the  service  may 
require. 


F. 
DISBURSING   OFFICERS. 

[SECTION   3620   OF   THE   REVISED   STATUTES.] 

It  shall  be  the  duty  of  every  disbursing  officer  having  any 
public  money  intrusted  to  him  for  disbursement,  to  deposit  the 
same  with  the  Treasurer  or  some  one  of  the  assistant  treasurers 
of  the  United  States,  and  to  draw  for  the  same  only  as  it  may 
be  required  for  payments  to  be  made  by  him  in  pursuance  of 
law  [and  draw  for  the  same  only  in  favor  of  the  persons  to 
whom  payment  is  made]  ;  and  all  transfers  from  the  Treasurer 
of  the  United  States  to  a  disbursing  officer  shall  be  by  draft  or 
warrant  on  the  Treasury  or  an  assistant  treasurer  of  the  United 
States.  In  places,  however,  where  there  is  no  treasurer  or 
assistant  treasurer,  the  Secretary  of  the  Treasury  may,  when 
he  deems  it  essential  to  the  public  interest,  specially  authorize  in 
writing  the  deposit  of  such  public  money  in  any  other  public 
depository,  or,  in  writing,  authorize  the  same  to  be  kept  in  any 
other  manner,  and  under  such  rules  and  regulations  as  he  may 
deem  most  safe  and  effectual  to  facilitate  the  payments  to  public 
creditors. 


APPENDIX.  287 


ACCOUNTS. 

[SECTION   3622    OF   THE   REVISED   STATUTES.] 

Every  officer  or  agent  of  the  United  States  who  receives  pub- 
lic money  which  he  is  not  authorized  to  retain  as  salary,  pay,  or 
emolument,  shall  render  his  accounts  monthly.  Such  accounts, 
with  the  vouchers  necessary  to  the  correct  and  prompt  settle- 
ment thereof,  shall  be  sent  by  mail,  or  otherwise,  to  the  Bureau 
to  which  they  pertain,  within  ten  days  after  the  expiration  of 
each  successive  month,  and,  after  examination  there,  shall  be 
passed  to  the  proper  accounting  officer  of  the  Treasury  for  set- 
tlement. Disbursing  officers  of  the  Navy  shall,  however,  render 
their  accounts  and  vouchers  direct  to  the  proper  accounting  offi- 
cer of  the  Treasury.  In  case  of  the  non-receipt  at  the  Treasury, 
or  proper  Bureau,  of  any  accounts  within  a  reasonable  and  proper 
time  thereafter,  the  officer  whose  accounts  are  in  default  shall 
be  required  to  furnish  satisfactory  evidence  of  having  complied 
with  the  provisions  of  this  section.  The  Secretary  of  the  Treas- 
ury may,  if  in  his  opinion  the  circumstances  of  the  case  justify 
and  require  it,  extend  the  time  hereinbefore  prescribed  for  the 
rendition  of  accounts.  Nothing  herein  contained  shall,  how- 
ever, be  construed  to  restrain  the  heads  of  any  of  the  Depart- 
ments from  requiring  such  other  returns  or  reports  from  the 
officer  or  agent,  subject  to  the  control  of  such  heads  of  [Depart- 
ment] [Departments]  as  the  public  interest  may  require. 


288  APPENDIX. 

H. 
NATIONAL  BANK  DEPOSITORIES. 

[SECTION   5153    OF   REVISED   STATUTES.] 

All  national  banking  associations,  designated  for  that  pur- 
pose by  the  Secretary  of  the  Treasury,  shall  be  depositaries  of 
public  money,  except  receipts  from  customs,  under  such  regula- 
tions as  may  be  prescribed  by  the  Secretary ;  and  they  may  also 
be  employed  as  financial  agents  of  the  Government ;  and  they 
shall  perform  all  such  reasonable  duties,  as  depositaries  of  pub- 
lic moneys,  and  financial  agents  of  the  Government,  as  may  be 
required  of  them.  The  Secretary  of  the  Treasury  shall  require 
the  associations  thus  designated  to  give  satisfactory  security,  by 
the  deposit  of  United  States  bonds  and  otherwise,  for  the  safe- 
keeping and  prompt  payment  of  the  public  money  deposited 
with  them,  and  for  the  faithful  performance  of  their  duties  as 
financial  agents  of  the  Government.  And  every  association  so 
designated  as  receiver  or  depositary  of  the  public  money  shall 
take  and  receive  at  par  all  of  the  national  currency  bills,  by  what- 
ever association  issued,  which  have  been  paid  into  the  Govern- 
ment for  internal  revenue,  or  for  loans  or  stocks. 


APPEXDIX. 


289 


III. 


CORRECT  CURRENCY  STATEMENT. 

The  monthly  currency  statements  issued  by  the  Government 
are  misleading.  They  take  no  account  of  gold  bullion  held  by 
the  Treasury,  and  they  count  as  money  in  the  Treasury  both 
coin  and  the  certificates  which  represent  it,  as  well  as  both  cur- 
rency certificates  and  the  notes  against  which  they  are  issued. 
The  erroneousness  of  the  Government  statement  of  the  amount  of 
money  in  the  Treasury  appears  from  the  table  below.  An 
explicit  account  of  the  differences  between  the  two  statements, 
with  the  reasons  therefor,  is  given  in  the  Commercial  and  Finan- 
cial Chronicle  of  January  30,  1892  ;  and  the  subject  is  discussed 
in  part  in  the  report  of  the  Treasurer  of  the  United  States  for 
1891,  under  the  head  of  Treasury  Notes  of  1890. 


Treasury  Statement  of  the  Amount  of 

Corrected  Statement  for  the 

Money  in  the  Treasury, 

Oct.  1,  1892. 

Same  Date. 

Cold  coin 

$164,550,486 

Net    gold    coin   and 

Standard  silver  dollars 

•  356,173.732 

bullion 

$"9, 

Subsidiary  silver 

12,551.498 

Net  silver  coin   and 

Hold  certificates        ... 

25,345,59° 

bullion 

-.xl",i-4 

Silver  certificates 

2,619,477 

Treasury  notes  of  1890 

5,482,485 

Treasury  notes  of  1890 

5,482,485 

United  States  Notes 

24,077,858 

United  States  notes   . 

6,787,858 

Currency  certificates  (Act,  June 

8,  1872)        .... 

970,000 

National  bank  notes 

7,701,652 

National  bank  notes  . 

7,701,652 

Fractional  silver 

5 

12,551,498 

Total  cash  in  Treasury    . 

$599,472, 778 

54,759.126 

Amt.  in  nat.  bank  depositories 

15.496,513 

Total  government  cash  . 

$599,472  778 

$ 

70.255,639 

290 


APPENDIX. 


IV. 

AVERAGE   MONTHLY   SURPLUS   OF   NEW   YORK 
BANKS. 


J888. 

1 889. 

1890. 

1891. 

Average  for 
Four  Years. 

January 

18,676 

15.7S4 

8,971 

18,036 

15-367 

February 

16,506 

14,865 

5-855 

i6,935 

13-540 

March 

10,014 

7,192 

2,253 

9,543 

7,250 

April 

12,463 

8,247 

1,638 

5,824 

7,043 

May 

24,506 

14,423 

3,002 

5-974 

11,976 

June 

27,840 

9,618 

6,172 

12,939 

14,127 

July 

27,651 

6,498 

5,496 

17,052 

14,174 

August 

27,590 

5-°44 

3-53° 

16,479 

13,161 

September 

12,742 

4,044 

5,172 

7,4n 

7,342 

October 

13,612 

1,113 

3>l69 

9,500 

6,849 

November 

11,384 

1,172 

962 

11,161 

6,169 

December 

8,122 

2,.  87 

3,815 

16,961 

8,272 

1  Three  figures  are  omitted.     The  Table  is  compiled  from  returns  in  the  Finan- 
ial  Chronicle  and  the  New  York  Journal  of  Commerce. 


APPENDIX.  29I 


V. 

THE   FRENCH    INDEMNITY   INCIDENT. 

The  history  of  the  trouble  that  occurred  between  the  Bank 
and  the  Administration  in  the  matter  of  the  payment  of  the 
French  indemnity  is  as  follows  :  — 

By  the  treaty  signed  at  Paris,  July  4,  1831,  and  ratified  in 
Washington  in  the  following  February,  the  French  Government 
agreed  to  pay  at  Paris  twenty-five  millions  of  francs,  in  six  annual 
instalments,  on  the  order  of  the  United  States,  for  distribution 
among  those  entitled  to  it,  in  settlement  of  all  claims  against 
France,  by  citizens  of  this  country  for  injuries  and  losses  sus- 
tained during  the  Napoleonic  wars,  between  1800  and  1817. 
Under  this  treaty  Secretary  McLane  drew  a  bill  on  France,  pay- 
able to  the  cashier  of  the  bank  of  the  United  States.  The 
amount  was  credited  to  the  Government  by  the  bank,  and  the 
draft  sent  to  Europe  for  collection.  The  amount  credited  was 
not  carried  into  the  Treasury  by  warrant,  and  no  part  of  it 
was  ever  withdrawn.  Payment  of  the  draft  was  refused  by  the 
French  Treasury,  because  the  treaty  had  not  yet  been  ratified 
by  the  Chambers.  Hottinguer  &  Co.  took  the  note  up,  for  the 
honor  of  the  bank,  and  debited  the  bank  with  the  amount  plus 
interest  and  costs.  The  bank  immediately  notified  Secretary 
McLane  that  it  would  hold  him  responsible  for  principal,  inter- 
est, costs,  damages,  and  exchange.  The  claim  for  damages  was 
made  under  an  old  law  of  Maryland,1  which  was  operative  also 
in  the  District  of  Columbia,  by  which  fifteen  per  cent,  damages 
were  allowed  on  foreign  bills  of  exchange  that  went  to  protest. 
On  the  advice  of  Attorney-General  Taney,  the  claim  for  damages 

1  Ch.  38,  Acts  1785  ;  see  Dorsey'^  Maryland  Statutes,  i.  197. 


292  APPENDIX. 

was  disallowed.  The  bank  then  indemnified  itself  by  withhold*- 
ing  part  of  the  Government  dividend,  and  suit  was  brought  for 
its  recovery  in  the  U.  S.  Circuit  Court  for  the  eastern  district 
of  Pennsylvania.  The  verdict  was  for  the  Government,  but  the 
case  went  to  the  Supreme  Court  on  an  exception.  The  judgment 
of  the  court,  delivered  by  Justice  McLean,  reversed  the  decision 
of  the  Circuit  Court,  and  remanded  the  case  for  a  new  trial. 
Justice  Catron  dissented  from  the  decision  and  Justice  Wayne 
concurred,  but  "  not  for  the  reasons  given  in  the  opinion  of  the 
court."  1  The  Government  finally  recovered  the  dividend  with- 
held. 

The  Finance  Committee  of  the  Senate  in  their  report  on  the 
bank,  in  the  second  session  of  the  23d  Congress,  indorsed  the 
action  of  the  bank. 

1   See  2d  Howard,  711  ;  15  Curtis,  257,  and  16  Curtis,  429. 


APPENDIX.  293 


VI. 

INFLUENCE   OF   SUB-TREASURY   ON    BANK 
MANAGEMENT. 

An  opinion  has  been  expressed  in  some  quarters  that  reliance 
of  the  banks  on  the  Government  disbursements  to  meet  the  fall 
demand  for  money,  has  produced  carelessness  among  the  banks 
in  the  matter  of  keeping  up  their  reserves.  For  instance,  the 
New  York  Commercial  and  Financial  Chronicle x  says  :  — 

"  The  time  was  when  our  banks  provided  beforehand  for  the  fall  trade, 
and  so  trimmed  their  sails,  if  we  may  be  permitted  to  use  the  expression, 
through  the  summer  months  as  to  avert  a  storm,  by  preparing  themselves  for 
the  crop  demand.  Of  late  years  they  have  looked  to  the  Treasury  wholly,  and 
have  gone  through  the  summer  trenching  on  their  reserves,  regardless  of  any 
increased  drain  sure  to  come  later  on." 

It  is  a  very  difficult  matter  to  prove  that  the  Independent 
Treasury  has  had  this  bad  influence  on  bank  management. 
On  the  face  of  the  matter  it  certainly  seems  a  possible  result  of 
the  system:  but  an  examination  of  the  reserves  of  the  associated 
banks  of  New  York  for  the  summer  months  of  several  years 
does  not  show  such  a  depletion  as  the  remarks  of  the  Chronicle 
might  lead  one  to  expect.  Moreover,  it  must  be  remembered 
that  the  summer  is  a  dull  season,  and  that  the  demand  for  loans 
is  slack.  Hence,  even  if  the  banks  should  desire  to  do  so,  the 
opportunity  for  the  banks  to  deplete  their  reserves  is  lacking 
them.  Below  are  given  the  opinions  of  officers  of  several  New- 
York  City  banks  on  the  remarks  of  the  Chronicle.  It  will  be 
seen  that  the  weight  of  opinion  is  against  that  of  the  Chronicle. 

1.  "It  seems  to  me  that  the  statement  is  not  exact.  .  .  . 
Owing  to  the  creation  of  money  reserve  centres  in  the  West,  and 
1  Dec.  6,  1890. 


294  APPENDIX. 

the  deflection  of  deposits  of  banks  from  New  York  to  these 
centres,  the  accumulation  of  surplus  funds  has  been  less  of  late 
years  in  New  York,  and  hence  the  withdrawals  to  move  the 
crops  have  been  smaller."  —  President  Com.  Exchange  National 
Bank,  March,  1892. 

2.  "  The  idea  that  banks  now,  or  of  late  years,  have  depended 
on  the  Treasury  for  assistance,  instead  of  preparing  themselves 
for  the  regular  autumn  demand  for  crop  movements,  is  entirely 
erroneous.11- —  Cashier  First  National  Bank,  Marc/130,  1892. 

3.  "  As  far  as  we  know,  the  banks  of  this  city  do  not  at  any 
time  make  their  calculations  relying  on  the  Treasurer  of  the 
United  States  for  assistance  in  perfecting  same,  nor  do  we  con- 
sider they  should,  or  that  it  would  be  wise  to  do  so.11 —  Cashier 
Importers'  and  Traders'  National  Bank,  March  20,  1892. 

4.  "Each  individual  bank  throughout  the  country,  if  fairly 
managed,  is  in  the  habit  of  estimating  its  dealers1  needs  irrespec- 
tive of  Treasury  conditions.  .  .  .  Extraordinary  accumulations 
in  the  Treasury,  however,  necessarily  called  for  heroic  rem- 
edies. .  .  .  Under  such  extraordinary  conditions  the  ordinary 
calculations  on  the  part  of  bankers  would  not  cover  the  case, 
hence  the  seeming  occasion  for  the  accusation  referred  to,  I 
presume."  —  President  Mercantile  National  Bank,  March  30, 
1892. 

5.  "  We  may  be  regarded  as  too  conservative,  .  .  .  but  we 
have  found  it  to  our  advantage  to  have  our  maturities  in  hand 
about  July  and  August,  to  meet  the  usual  demand  which  occurs 
at  that  season.  We  are  pursuing  that  course  to-day.11  —  Cashier 
Merchants'1  National  Bank,  March  30,  1892. 

6.  "  We  always  prepare  ourselves  carefully  for  the  fall  demand 
for  money  for  the  movement  of  the  crops,  .  .  .  and  keep  our 
loans  and  reserves  well  in  hand  throughout  the  summer  for  this 
purpose.11  —  President  National  Park  Bank,  March  30,  1892. 

7.  "  We  did  not  transact  our  business  on  the  lines  mentioned. 1 
Our  policy  was  to  strengthen  ourselves  with  our  own  resources 
for  the  demands  that  the  crops  might  bring  for  money.     I  am 

1   In  the  Chronicle. 


APPENDIX.  295 

under  the  impression  that  such  was  also  the  policy  of  all  of  the 
leading  banks  in  this  city.'1  — President  National  Batik  of  the 
Republic,  March  30,  1892. 

8.  "  We  believe  the  statement  to  be  partially  true." — Cashier 
National  B  roadway  Bank,  March  30,  1892. 

9.  ••  I  do  not  think  the  banks  in  this  city  have  relied  wholly 
upon  the  Treasury  to  provide  for  demands  which  recur  with  the 
regularity  of  seed-time  and  harvest.  It  has  no  doubt  been  their 
custom  to  employ  in  call  loans  the  money  reserved  for  moving 
the  crops,  and  when  the  demand  comes  the  borrower  is  depend- 
ent upon  the  open  market  for  the  money  to  pay  with.'1  —  Presi- 
dent National  Bank  of  Commacc.  April 2,  1892. 

10.  "  The  policy  of  this  bank  (and  which  has  been  carried 
out  by  its  practice)  has  been  to  keep  a  very  large  surplus  reserve, 
and  hence  we  have  not  relied  upon  the  Treasury  for  the  purpose 
in  question.  Speaking  for  the  banks  as  a  whole.  I  think  there 
is  some  truth  in  the  remarks  of  the  Chronicle."  —  President 
Chemical  National  Bank,  April  2,  1892. 

11.  "While  the  paragraph  J  may  be  somewhat  too  sweeping 
in  its  statements,  it  is.  I  think,  true  that  the  banks  generallv 
relied  at  the  time  referred  to,  more  or  less,  upon  relief  from  the 
Treasury.  .  .  .  But,  on  the  whole,  I  think  there  is  no  reason 
to  criticise  the  management  of  the  banks  as  a  body  "  [in  this 
respect] .  —  President  Western  National  Bank,  March  20,  1892. 

12.  "  We  are  of  the  impression  that  the  custom  is  quite  general 
among  the  banks  of  this  city,  to  make  due  provision  for  the 
fall  demand  for  money.'1  [The  writer  desires  not  to  be  quoted 
in  the  matter.] 

1  In  the  Chronicle. 


290  APPENDIX. 


VII. 

CIRCULAR.— ISSUE   AND   REDEMPTION   OF 
CURRENCY. 
1891. 

Department  No.  144. 

-= — -    ; — -= r= .„ —  T  REASURV   OF    THE   UNITED    STATES. 

Treasnrer's  Office,  m.  59.  n -aMngtont  D. c.,  September  «,  .« 


The  following  regulations  govern  the  issue  and  redemption  of 
the  paper  currency  and  the  gold,  silver,  and  minor  coins  of  the 
United  States,  and  the  redemption  of  national  bank  notes  by 
the  Treasurer  of  the  United  States  : 

I.  —  ISSUE   OF   UNITED   STATES   PAPER   CURRENCY. 

i.  The  Treasurer  will  forward  new  United  States  notes  by 
express,  at  the  expense  of  the  consignee,  at  Government  con- 
tract rates,  or  by  registered  mail,  registration  free,  at  the  risk  of 
the  consignee,  in  return  for  United  States  notes  unfit  for  circu- 
lation, national  bank  notes,  fractional  silver  coin,  or  minor  coin. 

2.  Gold  certificates  are  issued  upon  a  deposit  of  gold  coin 
with  the  Treasurer  or  an  Assistant  Treasurer,  in  denominations 
of  not  less  than  $20. 

3.  Silver  certificates  are  issued  by  the  Treasurer  or  Assistant 
Treasurers,  upon  a  deposit  of  standard  silver  dollars,  or  in  re- 
turn for  such  certificates  unfit  for  circulation  forwarded  for 
redemption. 

4.  Treasury  notes  of  1890  are  issued  in  payment  of  silver 
bullion,  purchased  under  the  act  of  July  14,  1890,  or  in  return 
for  such  notes  unfit  for  circulation  forwarded  for  redemption. 

II.  —  ISSUE   OF   GOLD   COIN. 

5.  Gold  coin  is  issued  in  redemption  of  United  States  notes, 
in  sums  not  less  than  $50,  by  the  Assistant  Treasurers  in  New 
York  and  San  Francisco. 


APPENDIX.  297 


III.  —  ISSUE    OF    STANDARD   SILVER    DOLLARS   AND   FRACTIONAL 
SILVER   COIN. 

6.  Standard  silver  dollars  are  issued  in  redemption  or  ex- 
change of  silver  certificates  and  Treasury  notes  of  1890,  by  the 
Treasurer  or  Assistant  Treasurers. 

7.  Upon  the  deposit  of  an  equivalent  sum  in  United  States 
currency  or  national  bank  notes  with  the  Treasurer  or  any 
Assistant  Treasurer  or  national  bank  depositary,  fractional  silver 
coin  will  be  paid  in  any  amount  by  the  Treasurer  or  Assistant 
Treasurers  in  the  cities  where  their  several  offices  are,  or  will  be 
sent  by  express,  in  sums  of  $200  or  more,  at  the  expense  of  the 
Government,  or  by  registered  mail  in  packages  of  $50,  registra- 
tion free,  from  the  most  convenient  Treasury  office,  to  the  order 
of  the  depositor.  For  this  purpose  drafts  may  be  sent  to  the 
Treasurer  or  any  Assistant  Treasurer,  payable  in  their  respec- 
tive cities. 

IV.  —  ISSUE   OF   MINOR    COIN. 

8.  Minor  coin  is  issued  under  the  following  regulations  of  the 
Director  of  the  Mint :  — 

Five-cent  nickel  pieces  and  one-cent  bronze  pieces  will  be 
forwarded  in  the  order  of  application  from  the  United  States 
Mint  at  Philadelphia,  Pa.,  to  points  reached  by  express  com- 
panies, free  of  transportation  charges,  in  sums  of  $20  or  multi- 
ples thereof,  upon  receipt  and  collection  by  the  Superintendent 
of  that  Mint  of  a  draft  on  New  York  or  Philadelphia,  payable  to 
his  order.  To  points  not  readied  by  express  companies,  and 
where  delivery  under  contract  with  the  Government  is  thus  im- 
practicable, the  above  coin  can,  on  the  same  terms,  be  sent  by 
registered  mail  at  applicant's  risk,  registry  fee  on  same  to  be 
paid  by  the  Government.  Orders  for  transportation  at  risk 
of  applicant  should  express  acceptance  of  the  risk. 

9.  The  Treasurer  and  Assistant  Treasurers  will  pay  out  for 
lawful  money  any  minor  coin  not  needed  in  the  current  business 
of  their  offices. 


>93  APPENDIX. 


V.  —  ISSUE   OF   THE   TREASURER'S   TRANSFER-CHECKS. 

10.  Subject  to  the  convenience  of  the  Treasury,  the  Treas- 
urer will  issue  transfer-checks  on  the  Assistant  Treasurers,  pay- 
able to  the  order  of  the  sender  or  his  correspondent,  for  United 
States  notes  unfit  for  circulation,  or  national  bank  notes  sent  to 
the  Treasurer  for  redemption,  or  for  fractional  silver  coin  or 
minor  coin  sent  in  multiples  of  $20  to  the  Treasurer  or  Assist- 
ant Treasurer. 

VI.  — REDEMPTION   OF   UNITED   STATES   PAPER   CURRENCY. 

11.  United  States  notes,  fractional  currency  notes,  gold  cer- 
tificates, silver  certificates,  and  Treasury  notes  of  1890,  are 
redeemable  by  the  Treasurer,  and  when  not  mutilated  so  that 
less  than  three-fifths  of  the  original  proportions  remain  [s] ,  by  the 
several  Assistant  Treasurers,  at  face  value.  United  States 
notes  are  redeemable  in  coin,  in  sums  not  less  than  $50,  by  the 
Assistant  Treasurers  in  New  York  and  San  Francisco.  Silver 
certificates  are  redeemable  in  standard  dollars  only,  or  exchange- 
able for  other  silver  certificates. 

12.  United  States  notes,  fractional  currency  notes,  gold  cer- 
tificates, silver  certificates,  and  Treasury  notes  of  1890,  when 
mutilated  so  that  less  than  three-fifths,  but  clearly  more  than 
two-fifths,  of  the  original  proportions  remain[s],  are  redeemable 
by  the  Treasurer  only,  at  one-half  the  face  value  of  the  whole 
note  or  certificate.  Fragments  not  clearly  more  than  two-fifths 
are  not  redeemed,  unless  accompanied  by  the  evidence  required 
in  paragraph  13. 

13.  Fragments  less  than  three-fifths  are  redeemed  at  the  face 
value  of  the  whole  note  when  accompanied  by  an  affidavit  of 
the  owner  or  other  persons  having  knowledge  of  the  facts  that 
the  missing  portions  have  been  totally  destroyed.  The  affidavit 
must  state  the  cause  and  manner  of  the  mutilation,  and  must  be 
sworn  to  and  subscribed  before  an  officer  qualified  to  administer 
oaths,  who  must  affix  his  official  seal  thereto,  and  the  character 


APPENDIX.  299 

of  the  affiant  must  be  certified  to  be  good  by  such  officer  or 
some  other  having  an  official  seal.  Signatures  by  mark  [X] 
must  be  witnessed  by  two  persons  who  can  write,  and  who 
must  give  their  places  of  residence.  The  Treasurer  will  exer- 
cise such  discretion  under  this  regulation  as  may  seem  to  him 
needful  to  protect  the  United  States  from  fraud.  Fragments 
not  redeemable  are  rejected  and  returned. 

VII.  —  REDEMPTION*   OF   NATIONAL   BANK   NOTES. 

14.  National  bank  notes  are  redeemable  by  the  Treasurer  in 
sums  of  $1,000  or  any  multiple  thereof. 

15.  Notes  equalling  or  exceeding  three-fifths  of  their  original 
proportions,  and  bearing  the  name  of  the  bank  and  the  signature 
of  one  of  its  officers,  are  redeemable  at  their  face  value. 

16.  Notes  of  which  less  than  three-fifths  remains,  or  from 
which  both  signatures  are  lacking,  are  not  redeemed  by  the 
Treasurer,  but  should  be  presented  for  redemption  to  the  bank 
of  issue.  Fragments  less  than  three-fifths  are  accepted  from 
the  bank  of  issue  for  face  value  by  the  Treasurer  onlv  when 
accompanied  by  evidence,  as  required  by  paragraph  13,  that  the 
missing  portions  have  been  totally  destroyed. 

17.  Fragments  redeemed  by  the  bank  of  issue  for  less  than 
face  value  are  accepted  by  the  Treasurer  only  when  their  valua- 
tion is  equal  to  the  face  value  of  a  note  of  some  denomination 
issued  by  the  bank,  or-  some  multiple  thereof.  The  required 
valuation  may  be  made  up  of  several  "ragments  of  notes  of  the 
same  or  different  denominations.  Fragments  not  clearly  more 
than  two-fifths  are  acceptable  only  when  accompanied  by  evi- 
dence, as  required  by  paragraph  13,  that  the  missing  portions 
have  been  totally  destroyed. 

18.  It  having  been  decided  that  national  bank  notes  stolen 
when  unsigned,  and  put  in  circulation  with  forged  signatures, 
are  not  obligatory  promissory  notes  of  the  banks  under  Section 
5182  of  the  Revised  Statutes,  they  are  not  redeemed  by  the 
Treasurer. 


;oo  atpe  x  nix. 


VIII.  —  REDEMPTION   OR     EXCHANGE   OF    FRACTIONAL   SILVER 
COIN,    MINOR   COIN,    AND   STANDARD   SILVER   DOLLARS. 

ig.  Fractional  silver  coin  and  coins  of  copper,  bronze,  or 
copper-nickel  may  be  presented  in  sums  or  multiples  of  $20, 
assorted  by  denominations  in  separate  packages,  to  the  Treas- 
urer or  an  Assistant  Treasurer  for  redemption  or  exchange  into 
lawful  money,  and  standard  silver  dollars  for  exchange  into  sil- 
ver certificates  only.  When  forwarded  by  express,  the  charges 
should  be  prepaid. 

20.  No  foreign  or  mutilated  silver  coin  will  be  redeemed. 
Reduction  by  natural  abrasion  is  not  considered  mutilation. 

21.  Minor  coin  that  is  so  defaced  as  not  to  be  readily  identi- 
fied, or  that  is  punched  or  clipped,  will  not  be  redeemed  or  ex- 
changed. Pieces  that  are  stamped,  bent,  or  twisted  out  of  shape, 
or  otherwise  imperfect,  but  showing  no  material  loss  of  metal, 
will  be  redeemed. 

IX.  —  TRANSMISSION   TO   THE    TREASURER. 

22.  United  States  notes,  gold  certificates,  silver  certificates, 
Treasury  notes  of  1890,  and  national  bank  notes  should  be  for- 
warded in  separate  remittances.  The  notes  should  be  assorted 
by  denominations  and  enclosed  in  paper  straps,  not  more  than 
one  hundred  notes  to  each  strap,  and  the  straps  should  be  marked 
with  the  amount  of  their  contents.  Not  more  than  eight  thousand 
notes  should  be  put  in  one  package. 

23.  An  inventory,  giving  the  amount  of  each  denomination  of 
notes,  the  total  amount  in  the  package,  the  address  of  the  party 
sending,  and  the  disposition  to  be  made  of  the  proceeds,  should 
be  enclosed  with  each  package,  and  a  letter  of  advice  sent  by 
mail. 

24.  The  package,  if  it  be  sent  by  express,  should  be  sealed 
up  in  stout  paper  and  addressed  to  the  "Treasurer  of  the  United 
States,  Washington,  D.  C."  The  wrapper  should  be  plainly 
marked  with  the  owner's   name  and  address,  the  amount  and 


APPENDIX.  301 

kind  of  currency  enclosed,  and,  if  the  sender  desires  the  benefit 
of  the  Government  contract,  with  the  words,  "Under  Government 
contract  with  the  United  States  Express  Company." 

25.  It  is  the  duty  of  postmasters  to  register  free  of  charge  all 
letters  on  which  the  postage  has  been  fully  prepaid,  addressed 
to  the  Treasurer,  containing  currency  of  the  United  States'  for 
redemption.  It  is  recommended  that  all  such  letters  be  regis- 
tered as  a  protection  against  loss. 

26.  Remittances  of  money  by  mail  should  be  addressed  to  the 
"Treasurer  of  the  United  States,  Washington,  D.  C."  Such 
remittances  and  returns  therefor  by  mail  are  invariably  at  the 
risk  of  the  owners.  All  communications  to  the  Treasurer  in 
regard  to  packages  lost  in  the  mail  are  referred  for  investigation 
to  the  Chief  Post-Office  Inspector.  Post-Office  Department, 
Washington,  D.  C,  to  whom  any  subsequent  inquiry  on  the 
subject  should  be  addressed. 

X.  —  EXPRESS-CHARGES. 

27.  The  Government  contract  with  the  United  States  Express 
Company  for  the  transportation  of  moneys  and  securities  extends 
to  all  points  accessible  through  established  express  lines  reached 
by  continuous  railway  communication,  but  does  not  embrace  sea 
or  river  transportation  of  any  kind,  and  does  not  extend  west- 
ward beyond  the  Missouri  River,  but  includes  the  States  of 
Missouri,  Arkansas,  and  Texas. 

28.  The  contract  rates  for  the  transportation  of  all  kinds  of 
paper  currency  to  or  from  Washington  are  — 

Between  Washington  and  points  in  the  territory  of  the  United 
States  Express  Company  and  reached  by  it,  15  cents  per  $1,000; 
sums  of  $500  or  less,  10  cents. 

Between  Washington  and  points  in  the  territory  of  another 
express,  excepting  points  in  Texas  and  Arkansas,  50  cents  per 
$1,000  ;   sums  of  $500  or  less,  30  cents. 

Between  Washington  and  points  in  Texas  and  Arkansas,  75 
cents  per  $1,000  ;  sums  of  $500  or  less,  50  cents. 


302  APPENDIX. 

29.  Express  charges  are  paid  by  the  Government,  at  contract 
rates,  on  standard  silver  dollars  sent  by  the  Treasurer  or  Assist- 
ant Treasurers  in  sums  or  multiples  of  $500,  on  fractional  silver 
coin  in  sums  of  $200  or  more,  on  minor  coin  sent  from  the  mint 
at  Philadelphia  in  sums  or  multiples  of  $20,  and  on  national  bank 
notes  sent  to  the  Treasurer  for  redemption  in  sums  or  multiples 
of  $1,000. 

30.  On  United  States  notes,  gold  certificates,  silver  certificates, 
or  Treasury  notes  of  1890,  sent  for  redemption  or  for  credit  of 
the  five  per  cent,  redemption  fund,  and  on  national  bank  notes 
sent  for  redemption  in  other  amounts  than  multiples  of  $1,000, 
the  charges,  if  not  prepaid,  are  deducted  from  the  proceeds  at 
contract  rates. 

3 1 .  On  United  States  notes,  gold  certificates,  silver  certificates, 
or  Treasury  notes  of  1890,  returned  for  United  States  currency 
or  national  bank  notes  redeemed,  the  charges  are  deducted  at 
contract  rates. 

32.  On  standard  silver  dollars,  fractional  silver  coin,  and  minor 
coin,  sent  for  exchange  or  redemption  the  charges  must  be  pre- 
paid by  the  sender. 

33.  On  transfers  of  funds  from  national  bank  depositaries, 
under  letters  of  instruction,  the  charges  must  be  paid  by  the 
depositaries. 

34.  The  Treasurer  has  no  control  over  rates  exacted  when 
the  charges  are  prepaid,  or  for  transportation  outside  of  the 
territorial  limits  of  the  contract. 

35.  No  charge  is  made  for  the  amount  of  express-charges 
enclosed  with  a  remittance  of  even  thousands  of  dollars,  when 
separately  noted  on  the  wrapper.  Packages  should  always  be 
marked  with  the  exact  amount  of  the  contents. 


XI.  —  GENERAL   INFORMATION. 

36.  Paper  currency  presented  for  redemption  or  exchange,  or 
for  credit  of  the  Treasurerat  the  offices  of  the  Assistant  Treasurers, 
must  be  assorted  by  kinds,  and  enclosed  in  paper  straps,  the 


APPEXDIX.  303 

straps  not  to  contain  more  than  one  hundred  notes  each,  and  to 
be  plainly  marked  with  the  amount  of  the  contents. 

37.  The  act  of  June  30,  1876  (19  Statutes,  64),  requires 
"  that  all  United  States  officers  charged  with  the  receipt  or 
disbursement  of  public  moneys,  and  all  officers  of  national 
banks,  shall  stamp  or  write  in  plain  letters  the  word  '  counter- 
feit,1 'altered,'  or  '  worthless,' upon  all  fraudulent  notes  issued 
in  the  form  of  and  intended  to  circulate  as  money  which  shall 
ht  presented  at  their  places  of  business;  and  if  siith  officers 
shall  wrongfully  stamp  any  genuine  note  of  the  United  States 
or  of  the  national  banks,  they  shall,  upon  presentation,  re- 
deem such   notes  at  the   face  value  thereof.*1 

38.  Counterfeit  notes  or  coins  found  in  remittances  to  this 
office  are  returned  to  the  sender  cancelled,  for  the  purpose  of 
enabling  him  to  make  reclamation  ;  and  after  such  use  they  must 
be  returned  to  this  office  for  transfer  to  the  Secret-Service  Divis- 
ion of  the  Treasury  Department. 

39.  In  case  of  the  loss  or  destruction  of  one  of  the  Treasurer's 
checks,  and  upon  application  for  a  duplicate,  payment  of  the 
original  check  is  stopped,  and  the  applicant  is  furnished  with  a 
form  of  bond  of  indemnity,  upon  return  of  which,  properly  exe- 
cuted, a  duplicate  is  issued. 

Compliance  with  the  foregoing  regulations  is  enjoined  on  all 
officers  of  the  Department,  and  observance  of  them  will  be 
expected  of  all  making  remittances  to  this  office. 

E.  H.  Xebeker, 
Treasurer  U.  S. 
Approved : 

A.  B.  Nettleton, 

Acting  Secretary  of  tlic  Treasury. 


304  APPENDIX. 


VIII. 

CIRCULAR.— REGULATIONS  FOR  THE  DEPOSIT 
OF  PUBLIC  MONEYS. 

18H8.  Treasurv  Department, 

Depart  iin  n!  So.  7.  Office  of  the  Secretary, 

_JiViS10U  Ul  PUb.lC  MOlieyS.  Washington,  B.C.,  January  12,  iS38. 

To  Collectors  ami  Surveyors  of  Customs,  Collectors  of  Internal 
Revenue,  Receivers  of  Public  Moneys  for  Lands,  Marshals, 
Clerks  of  Courts,  and  all  other  Officers  or  Agents  of  the 
United  States  engaged  in  collecting,  depositing,  or  transmit- 
ting Public  Moneys  :  — 

The  following  regulations,  based  upon  specific  provisions  of 
existing  laws,  for  the  violation  of  which  penalties  of  a  severe 
character  are  provided,  are  hereby  prescribed,  and  a  strict  com- 
pliance therewith  enjoined :  — 

COLLECTIONS. 

Collectors  and  Surveyors  of  Customs,  Collectors  of  Internal 
Revenue,  and  Receivers  of  Public  Moneys,  living  in  the  same 
city  or  town  with  an  Assistant  Treasurer  or  Designated  Deposi- 
tary, must  deposit  their  receipts  at  the  close  of  each  day.  Offi- 
cers at  such  a  distance  from  a  depository  that  daily  deposits  are 
impracticable,  must  forward  their  receipts  as  often  as  they  amount 
to  one  thousand  dollars,  and  at  the  end  of  each  month  without 
regard  to  the  amount  then  accumulated. 

All  collections  must  be  deposited  to  the  credit  of  the  Treas- 
urer of  the  United  States,  except  moneys  received  by  Collectors 
of  Internal  Revenue  from  sales  under  Section  3460,  Revised 
Statutes  of  the  United   States,  or   from   offers   of  compromises 


APPENDIX.  305 

when  received  prior  to  the  acceptance  of  the  offer,  which  must  be 
deposited  to  the  credit  of  the  Secretary  of  the  Treasury  as  here- 
tofore. 

District  Attorneys,  Marshals,  and  Clerks  of  Courts  who  re- 
ceive public  moneys  accruing  to  the  United  States  from  fines, 
penalties,  and  forfeitures,  fees,  costs  (including  costs  in  criminal 
sui.s  for  violations  of  the  postal  laws),  forfeitures  of  recogni- 
zances, debts  clue  the  United  States,  interest  on  such  debts,  sales 
of  public  property,  or  from  any  other  sources,  will  deposit  the 
same  in  accordance  with  the  foregoing  paragraphs,  except  monevs 
accruing  from  customs  (including  navigation)  and  internal-reve- 
nue cases,  which  should  be  paid  to  the  Collector  or  Surveyor  of 
Customs  or  Collector  of  Internal  Revenue  of  the  district  in  which 
the  case  arose,  and  moneys  accruing  from  civil  post-office  suits, 
a.ndf/ws  in  criminal  cases  for  violation  of  the  postal  laws,  which 
should  be  deposited  to  the  Treasurer's  credit  for  the  use  of  the 
Post-Office  Depart //lent. 

The  Department  encourages  the  practice  of  a  Deputy  Collec- 
tor or  Agent  depositing  directly  with  a  depositary  in  the  name 
of  his  principal,  believing  that  greater  economy  and  despatch  will 
thereby  be  attained.  In  such  cases  the  depositor  will  take  cer- 
tificates of  deposit  in  the  name  of  the  Collector  or  other  officer 
whose  agent  he  is,  or  for  whom  he  is  acting,  to  whom  the  certi- 
ficates should  be  forwarded  for  disposition  as  hereinafter  pro- 
vided. 

DISBURSING   FUNDS. 

All  moneys  advanced  from  the  Treasury  to  any  officer  or 
agent  of  the  Government  for  disbursement,  or  coming  into  his 
hands,  must  be  deposited  to  his  official  credit  as  such  disbursing 
officer  or  agent,  and  drawn  upon  only  in  his  official  capacity. 

Deposits  of  such  moneys  may  be  made  with  the  Treasurer, 
an  Assistant  Treasurer,  or  any  designated  depositary  of  the 
United  States,  if  specially  authorized  by  the  Secretary  of  the 
Treasury  for  that  purpose  under  the  provisions  of  Section  3620, 
Revised  Statutes  of  the  United  States,  and  not  otherwise.     In 


306  APPENDIX. 

case  no  such  special  authority  has  been  given  to  a  convenient 
depositary,  application  should  be  made  to  the  Secretary  of  the 
Treasury  for  such  authorization. 

CERTIFICATES   OF    DEPOSIT. 

Hereafter  the  originals  of  all  certificates  of  deposit  for  the 
deposit  of  any  and  all  public  moneys,  of  every  character  and 
description,  except  as  stated  in  the  next  succeeding  paragraph, 
should  be  forwarded  to  the  Secretary  of  the  Treasury  immedi- 
ately upon  their  receipt  by  the  depositors,  who,  before  trans- 
mitting them,  should  see  that  their  amounts  correspond  with 
the  amounts  actually  deposited  by  them. 

EXCEPTIONS. 

Those  issued  to  Disbursing  Officers  for  disbursing  funds 
deposited  to  their  official  credit,  subject  to  the  payment  of  their 
checks,  and  more  properly  called  Disbursing  Officers'  receipts, 
should  be  retained  in  their  own  possession ;  those  issued  for  the 
transfer  of  funds  from  one  Government  depository  to  another, 
and  on  account  of  silver  coin,  or  the  five  percent.  National  Bank 
Redemption  Fund,  should  be  forwarded  to  the  Treasurer  of 
the  United  States ;  and  those  issued  for  moneys  deposited  to 
the  credit  of  the  Treasurer  of  the  United  States  for  use  of  the 
Post -Office  Department  should  be  forwarded  to  the  Third 
Assistant  Postmaster-General. 

RECEIPTS. 

Receipts  given  to  district  attorneys,  marshals,  or  clerks  for 
moneys  paid  by  them  to  Collectors  and  Surveyors  of  Customs, 
should  be  sent  to  the  Solicitor  of  the  Treasury,  and  similar 
receipts  from  Collectors  of  Internal  Revenue  should  be  sent  to 
the  Commissioner  of  Internal  Revenue. 

Receipts  given  to  an  officer  for  deposits  of  his  disbursing 
funds  to  his  own  credit  should  be  retained  by  him  for  his  own 
security  as  above  stated. 


APPENDIX.  307 

Reference  is  hereby  made  to  Department's  Circulars  of  April 
3,  1879,  relative  to  the  transportation  of  public  moneys  by 
express;  August  24,  1876,  relative  to  disbursing  funds;  No- 
vember 28,  1879,  ar,d  June  2,  1882,  relative  to  offers  of  com- 
promise, and  January  21,  1874,  concerning  the  issue  and 
disposition  of  certificates.  Also,  to  Sections  3216,  3218,3617, 
3620,  3621,  3625,  and  5481  to  5505,  inclusive,  of  the  Revised 
Statutes  of  the  United  States. 

This  circular  supersedes  circular  regulations  for  the  deposit 
of  public  moneys  dated  January  3,  1876. 

C.  S.  Fairchild, 

Secretary. 


308  APPENDIX. 


IX. 

PROPOSALS     OF     HON.     MICHAEL    A.    HARTER    OF 

OHIO,    AS   TO   THE    CHARACTER   OF    BONDS 

TO    BE   REQUIRED   TO    SECURE 

CIRCULATION. 

[AS   REFORTED   IN   THE   BOSTON   HERALD   OF  JUNE    14,    1 892.] 

That  in  addition  to  the  United  States  bonds  now  required  by 
law  to  be  deposited  with  the  Treasurer  of  the  United  States 
to  secure  the  circulating  notes  of  national  banking  associations, 
the  comptroller  of  the  currency  is  hereby  authorized  and  required 
to  accept  registered  bonds  issued  by  any  railroad  corporation  or 
city  in  the  United  States  and  deposit  the  same  with  the  Treas- 
urer of  the  United  States  in  behalf  of  any  such  association  as 
security  for  its  circulating  notes,  subject  to  the  following 
restrictions  :  — 

First.  The  principal  and  interest  of  all  such  bonds  shall,  in 
expressed  terms,  be  payable  in  gold  coin  of  the  United  States. 

Second.  All  such  bonds  must  have  been  continuously  listed 
upon  some  regular  stock  exchange,  located  in  a  city  of  the 
United  States  having  a  population  of  not  less  than  500,000,  for 
at  least  five  years. 

Third.  No  bond  shall  be  accepted  upon  which  payment  of 
interest  has  at  any  time  been  in  default,  or  which  at  any  time 
within  three  years  prior  to  the  date  of  its  offer  for  acceptance 
has  sold  publicly  upon  any  stock  exchange  where  it  was  listed 
for  less  than  a  hundred  and  five  cents  on  the  dollar  of  its  face 
value. 

Fourth.  No  bond  shall  be  accepted  if  the  total  tax  levy  of 
the  city  issuing  it  exceeds  two  per  cent,  per  annum. 


APPENDIX.  309 

Fifth.  Xo  railroad  bond,  not  regularly  secured  by  mortgage 
upon  the  roadbed  and  track,  shall  be  accepted. 

Sixth.  No  association  shall  be  permitted  to  have  more  than 
twenty  per  cent,  of  its  bonds  on  deposit  of  the  issue  of  any 
one  railroad  corporation  or  city. 

Seventh.  Whenever  any  class  of  bonds  on  deposit  has  been 
publicly  sold  below  par  for  a  period  of  thirty  days  upon  any 
stock  exchange  where  listed,  the  comptroller  shall  require  a 
bond  to  be  substituted  which  will  in  all  respects  meet  the 
requirements  of  this  act. 

Eighth.  Whenever  any  railroad  corporation  which  was  pay- 
ing dividends  upon  its  stock  when  its  bonds  were  accepted  1  >y 
the  comptroller  ceases  to  pay  dividends,  the  substitution  of 
other  and  proper  bonds  shall  be  required. 


3io 


APPENDIX. 


X. 

MONTHLY     GOVERNMENT    RECEIPTS     FROM     CUS- 
TOMS,   IN    MILLIONS   OF    DOLLARS.1 


iSSS. 

1889. 

1S91. 

Average. 

January 

18.3 

20.7 

-3-1 

20.7 

February 

16.7 

18.8 

19.0 

18.2 

March 

17.6 

19.2 

154 

17.4 

April 

1 7.8 

20.0 

1 2. 1 

16.6 

May 

1 5.6 

17.2 

12.0 

14.9 

June 

18.0 

17.6 

14.2 

16.6 

July 

19-5 

19.0 

15-5 

18.O 

August 

22.0 

21.5 

15.2 

19.6 

September 

19.0 

17.8 

14.1 

16.9 

October 

18.8 

18.8 

14.0 

17.2 

November 

15-3 

16.7 

12.7 

14.9 

December 

16.9 

15.9 

13.8 

*5-5 

1  The  figures  are  from  the  Chronicle. 


APPENDIX. 


3" 


XL 


GOVERNMENT  DISBURSEMENTS  FOR  FOUR  YEARS, 
IN   MILLIONS   OF   DOLLARS. 


1888. 

1S89. 

1S90. 

1 891. 

Aver. for  the 
Four  Years. 

January 

21.9 

26.6 

27.9 

24.0 

25.I 

February 

19.9 

33-8 

25.1 

3*-7 

27.6 

March 

15-5 

17.0 

'7-5 

3r-5 

20.4 

April 

24.9 

22.5 

29.9 

25-3 

25-7 

May 

27-5 

24.4 

27.2 

29.8 

22.2 

June 

16.6 

13.8 

14.9 

35-9 

20-3 

July 

36.1 

42.0 

38.1 

39-7 

39-0 

August 

22.2 

3S-3 

33-9 

20.7 

28.8 

September 

19-5 

16.5 

33-7 

23-9 

234 

October 

32.6 

28.6 

3S.0 

3*-9 

32.S 

November 

36.6 

25-3 

42.6 

27.9 

33-1 

December 

r5-5 

25.9 

21.9 

31.8 

3x-7 

312  APPENDIX. 


XII. 

ALLEGED  REPEAL  OF  THE  SUB-TREASURY  LAW. 

It  has  been  claimed  '  that  the  Sub-Treasury  law  was  repealed, 
incidentally,  as  it  were,  by  a  section  of  chapter  230  of  the  Acts 
of  the  41st  Congress,  second  session,  in  the  year  1870.  This 
chapter  deals  with  patents,  and  its  last  clause  enacts,  "  That  the 
acts  and  parts  of  acts  set  forth  in  the  schedule  of  the  acts  cited, 
hereto  annexed,  are  hereby  repealed,  without  reviving  any  acts  or 
parts  of  acts  repealed  by  any  of  said  acts,  or  by  any  clause  or 
provision  therein,"  etc.  Following  this  clause  is  the  schedule 
cited,  containing  the  titles  of  25  patent  laws  and  eight  copyright 
laws.  In  the  list  of  patent  laws  is  the  following:  "  August  6, 
1846,  chap.  90,  vol.  9,  page  59."  This  is  the  Independent 
Treasury  law.  Just  before  the  list  of  acts  repealed,  however,  is 
a  statement  that  the  repeal  affects  only  those  parts  of  them  which 
refer  to  patents.  There  appears  no  explanation,  unless  it  may 
have  been  a  clerical  error,  why  the  Independent  Treasury  Act 
should  have  been  put  among  those  that  have  to  do  with  patents. 
Of  course,  the  provision  that  the  repeal  should  apply  to  the  acts 
cited  only  in  so  far  as  they  relate  to  patents,  taken  in  connection 
with  the  fact  that  the  Independent  Treasury  law  does  not  so 
relate,  deprives  the  repealing  clause  of  any  effect  on  that  law. 

1  See  the  New  York  Tribune,  Sept.  23,  1873,  p.  t,  2d  column. 


APPENDIX.  3 1 3 


XIII. 

CIRCULAR.  — DEPARTMENT   OF   THE   INTERIOR, 

Bureau  of  Pensions, 
Washington,  D.C.,   April  2,  1891 

On  and  after  July  I,  1891,  pursuant  to  the  act  of  Congress 
approved  March  3,  1891,  and  to  the  directions  of  the  Secretary 
of  the  Interior,  quarterly  payments  of  pensions  will  be  made  as 
follows  :  — 

Group  1 .  —  July  4,  October  4,  January  4,  April  4. 


Buffalo,  N.Y. 
Concord,  N.H. 
Chicago,  111. 


Des  Moines,  Io. 
Milwaukee,  Wis. 
Pittsburgh,  Pa. 


Group  2.  —  August  4,  November  4,  February  4,  May  4. 

New  York,  N.Y. 


Indianapolis,  Ind. 
Knoxville,  Tenn. 
Louisville,  Ky. 


Philadelphia,  Pa. 
Topeka,  Kan. 


Group  3.  —  September  4,  December  4,  March  4,  June  4. 


Augusta,  Me. 
Boston,  Mass. 
Columbus,  O. 


Detroit,  Mich. 
San  Francisco.  Cal. 
Washington,  D.C. 

Green  B.  Raum, 

Commissioner. 


314  APPENDIX. 


XIV. 
AN   ASSOCIATED   NATIONAL   BANK. 

PLAN   OF   HON.    C.  N.    JORDAN,    EX-TREASURER   OF   THE   UNITED 
STATES,    FOR   REPLACING   THE   INDEPENDENT   TREASURY.  ' 

[Address given  before  the  Bankers''  Club  of  C/iieago,  Dec,  1888.] 

In  presenting  the  scheme  herewith  submitted,  permit  me  to 
say  that  I  can  make  no  claim  to  originality ;  but  that,  believ- 
ing that  experience  is  the  best,  —  in  fact,  the  only  guide  of  the 
Banker,  —  I  have  tried  to  adapt  the  main  features  of  the  banking 
organizations  known  as  the  Banks  of  England,  France,  and 
Germany,  to  the  requirements  of  our  political,  governmental, 
and  geographical  peculiarities  as  well  as  the  financial  past  of 
the  country  will  permit.  Besides  suggesting  the  formation  of 
an  Associated  National  Bank  to  take  the  place  of  the  present 
Sub-Treasury,  I  have  also,  in  view  of  the  almost  certain  de- 
struction of  the  National  Bank  Currency  within  the  next  two 
years,  caused  by  the  continuous  issue  of  the  silver  certificates, 
attempted  to  furnish  a  scheme  for  the  preservation  of  the  best 
system  of  currency  ever  used  by  this  or  —  I  might  almost  say  — 
any  other  country.  It  is  not  essential  to  the  creation  of  the 
proposed  Associated  National  Bank,  but  if  the  people  desire 
the  cheapest  form  of  currency  in  daily  use  yet  known  to  any 
commercial  nation,  to  be  perpetuated  for  their  benefit,  they  "will 
adopt  some  such  scheme,  in  order  to  preserve  the  country  from 
the  reverses  and  calamities  of  the  past. 

In  proposing  a  scheme  which  shall  do  away  with  the   Sub- 

1  There  are  many  points  of  resemblance  between  Mr.  Jordan's  plan  and  my  own, 
but  mine  was  elaborated  before  I  saw  Mr.  Jordan's  proposals. 


APPENDIX.  3  I  5 

Treasury,  a  great  difficulty  is  to  be  met  —  which  is,  that  a  sim- 
ple system  cannot  be  devised,  because  of  interstate  jealousies, 
and  the  violent  and  unfounded  prejudices  of  our  uneducated 
people,  against  the  National  Banking  System  ;  or  rather  agains1 
any  banking  system  whatever.  To  discuss  the  baseless  and 
unwarranted  character  of  these  jealousies  and  prejudices,  with 
the  causes,  would  need  an  essay,  and  you  will,  therefore,  please 
take  for  granted  the  arguments  which  might  be  used  in  prepar- 
ing the  ground  in  favor  of  the  present  proposition.  I  will  first 
state  that  which  I  think  you  will  all  grant  —  that  the  Sub-Treas- 
ury is,  has  been  and  will  continue  to  be,  the  greatest  source  of 
financial  danger  in  this  country,  and,  like  Carthage  of  old,  must 
be  destroyed,  in  order  that  we  may  enjoy,  as  far  as  possible, 
financial  peace. 

My  proposition  is  that  Congress  shall  cause  to  be  established 
an  "  Associated  National  Bank,11  to  be  located  in  the  city  of 
New  York,  and  organized,  as  near  as  maybe,  after  the  following 
manner :  — 

The  stock  in  this  bank  is  to  be  taken  by  the  banks  of  the 
country,  at  5  per  cent,  of  the  existing  bank  (both  State,  if  they 
choose  to  embrace  the  system,  and  National)  capital,  or  capital 
and  surplus  —  either  in  the  proportion  of  their  capital  to  popu- 
lation, or  providing  a  specific  sum  (banks  to  be  hereafter  organ- 
ized in  the  Southern  States,  or  States  poorly  supplied  at  present 
with  banking  facilities,  may  be  permitted  to  come  in  on  the  same 
terms  —  the  surplus  earnings,  if  any,  equalized  by  rate  at  which 
the  stock  is  taken),  a  certain  preference  being  given  to  banks 
with  reference  to  the  amount  of  circulation  issued  by  them  in 
proportion  to  their  capital.  This  would  give  to-day  a  capital  of 
say  $30,000,000.  All  deposits  of  the  Government  should  be 
made  a  preferred  lien,  the  subscribing  banks  being  liable  for  any 
deficit  to  the  extent  of  such  deficit,  ratably  to  stock  owned. 
This  would  give  an  additional  security  to  the  Government  of  say 
$600,000,000  of  banking  capital,  without  reference  to  the  existing 
surplus  of  the  banks.  The  capital  of  the  bank  should  be  limited 
to  forty  millions  of  dollars,  only  to  be  increased  from  the  actual 


3l6  APPENDIX. 

preliminary  subscription  in  the  manner  above  provided,  as  to 
new  banks  in  sections  of  the  country  now  poorly  supplied  with 
banking  capital. 

This  bank  should  have  no  right  to  issue  currency  except  in 
time  of  excessive  demand  ;  such  issue  not  to  be  made  except 
when  the  rate  of  interest  in  New  York  City  equals  or  exceeds 
8  per  cent.,  the  bank  to  hold  its  rate  of  interest  at  that  per- 
centage during  the  issuance  of  the  notes,  and  while  they  are 
outstanding;  or,  when  issued  under  such  circumstances,  be 
entitled  to  offer  from  time  to  time  such  a  rate  of  premium  as  will 
insure  the  quickest  possible  retirement  of  the  notes  issued  by 
reason  of  this  proviso.1 

The  bank  shall  receive  all  Government  deposits,  pay  all  Gov- 
ernment interest,  receiving  such  compensation  therefor  as  ?nay 
be  agreed  on  ;  shall  register  the  debt  of  the  United  States  ;  shall 
do  a  general  banking  business,  except  that  it  shall  not  receive 
the  deposits  of  persons  or  firms  other  than  banks  or  bankers ; 
will  not  be  permitted  to  pay  interests  on  deposits ;  2  may  accept 
trusts  ;  shall  receive  the  deposits  of  the  banks  on  account  of  the 
5  per  cent,  redemption  fund  and  "  retiring  circulation,  failed, 
and  reducing  funds  ;  "  except  that  the  sum  of  the  "  retiring  cir- 
culation fund,  failed  and  reducing  banks,"  shall  be  secured  by 
deposits  of  "  unified  legal-tender  debt,'"  hereafter  to  be  described, 
or  Government  bonds  as  at  present ;  these  bonds,  or  any  bonds 
held  as  security  for  this  class  of  deposits,  to  be  released  as  lia- 
bilities on  these  accounts  are  paid ;  may  receive  deposits  of 
states,  cities  and  municipal  corporations,  and  pay  their  interest 
in  the  manner  provided  for  the  General  Government ;  shall 
or  may  discount  for  other  banks  mercantile  paper,  or  bills  of 

1  The  German  provision  upon  this  point  defeats  itself,  as  it  provides  no  means  for 
early  retirement  of  the  notes  issued  during  a  time  of  stringency,  and  the  penalty  — 
the  payment  of  io  per  cent,  to  the  GovernmetH  —  is  too  severe  to  induce  an  issue  of 
the  notes. 

2  The  bank,  except  as  regards  foreign  banks  and  bankers,  should  not  receive  the 
accounts  of  o.her  banks,  except  as  provided,  .  .  .  the  object  to  be  attained  being 
the  endorsement  as  far  as  possible  by  a  New  York  bank  of  the  notes  discounted 
by  the  Associated  Bank. 


APPENDIX.  3 1 7 

exchange  drawn  on  existing  values ;  it  may  hold  the  deposits  as 
"  special  deposits"  of  other  banks  in  the  city  of  New  York,  in 
order  to  serve  as  the  holder  of  the  Clearing  House  funds  of  the 
respective  banks ;  the  coin,  or  legal  tenders,  composing  thes^ 
funds  shall  not  be  included  in  its  own  reserve ;  may  keep  and 
open  foreign  accounts,  being  permitted  (empowered)  to  make 
such  provision  therefor  as  it  may  deem  necessary  in  London, 
Paris,  Amsterdam,  Berlin,  Frankfort,  and  at  such  other  points 
as  it  may  desire  to  transact  a  general  exchange  business,  whether 
in  Europe  or  elsewhere ;  upon  the  agencies  thus  established 
(under  satisfactory  arrangements  to  be  previously  made)  the 
banks  throughout  the  country  could  draw  or  keep  accounts.  It 
shall  keep  50  per  cent,  reserve  on  all  liabilities,  except  the 
"retiring,  reducing,  and  failed"  bank  funds,  which  shall  be 
secured  by  deposits  of  bonds,  as  hereinafter  provided ;  25  pjr 
cent,  of  which  reserve  may  be  held  in  sight  exchange  on  Lon- 
don, Paris,  Amsterdam,  Frankfort,  or  Berlin  ;  it  shall  buy  gold 
bullion  at  a  rate  to  be  agreed  upon,  make  advances  on  silver  and 
gold  bullion,  or  gold  and  silver  coins  of  other  nations,  at  not  to 
exceed  98  per  cent,  of  their  actual  bullion  value.  It  shall  also 
act  as  the  Redeeming  Agent  for  the  National  Bank  issues 
throughout  the  country. 

The  same  provisions  as  to  redemption  as  are  now  contained 
in  the  National  Bank  law  shall  apply  to  the  notes  issued  under 
the  proposed  act,  as  hereafter  provided,  except  that  the  per- 
centage required  to  be  kept  as  a  redemption  fund  shall  be 
deposited  in  the  Associated  Bank.  The  expense  of  printing, 
circulation,  and  redemption,  as  well  as  of  the  National  Currency 
Bureau,  which  is  to  be  transferred  to  New  York,  to  be  borne 
by  the  national  banks,  as  provided  in  the  National  Banking  law, 
the  redemption  being  made  in  the  city  of  New  York.  The  25 
per  cent,  reserve  banking  clause  to  be  stricken  out  as  regards 
other  cities,  excepting  San  Francisco.  The  banks  shall  be 
exempt  from  tax  on  the  circulation  obtained  under  the  proposed 
act.  The  national  banks  shall  have  the  further  right  to  issue 
notes  upon  special  deposits  with  the  Associated  Bank  (which 


3 18  APPENDIX. 

can  only  be  paid  out  for  notes  redeemed,  and  by  check  or  veri- 
fication of  the  Comptroller  of  the  Currency)  of  standard  gold 
bullion,  gold  coin  of  full  weight  and  standard  fineness,  such  as 
sovereigns,  francs,  marks,  lire,  or  florins.1  The  small  notes, 
say  ones,  twos,  fives,  and  tens,  may  be  issued  upon  silver  bull- 
ion and  silver  coins  not  less  than  900  fine,  but  bullion  and  coin 
shall  be  rated  at  the  value  per  ounce  of  1,000  fine;  and  such 
deposits  of  silver  shall  only  be  available  for  bills  not  larger  than 
$10,  and  shall  be  redeemable  in  silver,  coin,  or  gold,  at  the 
option  of  the  banks.  (The  provision  as  to  silver  notes  to  be 
subject  to  future  action  of  the  English  or  associated  Govern- 
ments.) 

Its  affairs  shall  be  managed  by  a  general  manager,  who  shall 
have  had  as  a  bank  officer  at  least  seven  to  ten  years1  experience, 
to  be  nominated  by  the  banks,  and  nomination  approved  by  the 
President,  who  shall  serve  until  incapacitated,  or  be  retired 
after  so  many  years'  service,  with  pay  proportional  to  length  of 
service,  and  who  will  be  subject  to  immediate  dismissal  it  dis- 
honest, notoriously  incapable,  or  speculative ;  and  a  board  of 
directors  of  not  less  than  twenty-one  in  number,  of  whom  seven 
shall  be  residents  of  the  present  reserve  cities  (or  cities  in 
which  clearing-houses  may  exist),  as  specified  in  the  existing 
National  Bank  Act.  These  directors  shall  serve  for  terms  of 
two,  four,  and  six  years,  by  classes.  Fourteen  of  them  shall  be 
elected  from  the  city  of  New  York,  from  among  bank  officers, 
members  of  the  clearing-house,  and  be  presidents  or  cashiers, 
who  shall  have  served  at  least  seven  years  as  such  officers.  This 
latter  provision  shall  apply  to  the  seven  non-resident  directors, 
who  shall  be  elected  by  the  clearing-house  banks  in  the  re- 
spective reserve  cities,  or  such  as  have  clearing-houses.  The 
Government  shall  have  the  right  at  all  times  to  examine  the 
books  of  the  bank,  weekly  reports  of  its  condition  shall  be  made, 
and  a  semi-yearly  audit  and  statement  of  account  shall  be  made, 
in  the  manner  of  the  English  banks,  and  by  a  committee  ap- 

1  This  provision  is  intended  to  render  unnecessary  the  recoining,  at  great  loss, 
which  now  takes  place  of  foreign  coin  remit  Led  to  this  country. 


APPENDIX.  319 

pointed  by  the  banks  outside  of  the  city  of  New  York.  The 
receipts  from  customs,  etc.,  at  New  York  City,  shall  be  deposited 
in  the  proposed  bank,  receivable  and  payable  in  coin,  as  now 
provided  by  law,  unless  such  mode  of  payment  be  waived  by 
the  payer  or  receiver.  The  deposits  of  the  Government  at  all 
other  points  than  at  New  York  shall  be  deposited  in  the  national 
banks  at  the  different  points  of  deposit,  which  banks  are  to  be 
associated  through  their  clearing-houses,  which  are  to  be  given 
the  necessary  legal  functions,  and  which  deposits  are  to  be  se- 
cured by  deposit  of  the  securities  provided  by  the  proposed  law ; 
such  deposits  to  be  distributed/;-^  rata  among  the  banks  belong- 
ing to  the  clearing-houses  in  proportion  to  the  amount  of  securi- 
ties severally  deposited  by  them.  Any  excess  of  deposits  made 
over  and  above  the  bonds  required  of  these  banks  as  security 
for  deposits  to  be  immediately  remitted  to  the  Associated  Bank 
at  New  York  under  the  same  penalties  as  now  provided  by  law, 
and  under  the  supervision  and  at  the  risk  of  the  associated  clear- 
ing-house banks,  they  being  liable  for  all  deficits  which  may 
occur  by  reason  of  their  neglect  in  requiring  the  proper  amount 
of  security.  The  Associated  Bank  might  serve  as  a  clearing- 
house for  out-of-town  checks,  the  clearing-houses  of  the  different 
cities  receiving  and  paying  for  the  items  within  a  prescribed 
territory. 

The  Sub-Treasuries  in  the  different  cities  to  be  retained  as  to 
form  merely;  their  functions  to  be  suspended  for  the  term  of 
three  years,  unless  otherwise  provided  by  Congress ;  but  if 
through  actual  losses  and  inconvenience  experienced  by  the  peo- 
ple or  Government  in  the  transaction  of  daily  business,  it  shall 
then  be  demonstrated  that  the  change  of  system  has  not  been 

1  The  banks  associated  through  their  clearing-houses,  which  could  be  incorporated 
for  the  purpose,  giving  each  clearing-house  (the  capital  in  bonds  being  paid  in  by  th^ 
associated  banks  in  each  city)  the  power  to  receive  and  distribute  Government 
deposits,  but  no  other  banking  power,  to  each  member  in  proportion  to  amount  of 
bonds  deposited  by  such  member.  The  clearing-house  could  authorize  the  receipt  of 
Government  deposits  by  banks  within  a  certain  distance  from  each  city,  taking  from 
such  banks  such  security  as  the  incorporated  clearing-house  thought  proper,  but 
always  at  the  risk  of  such  clearing-house. 


320  APPENDIX. 

successful,  the  Sub-Treasuries  shall  be  revived,  and  the  present 
system  be  continued. 

The  Associated  National  Bank  shall  be  exempt  from  all  taxa- 
tion, both  state,  city  and  national,  but  as  compensation  for  such 
exemption  from  local  taxation  shall  be  required  to  do  all  the 
municipal  financial  business  of  the  state  and  city,  paying  inter- 
est, registering  debt,  etc.  (The  bank  shall  not  be  subject  to 
penalties  for  usury ;  but  the  Board  of  Directors,  by  a  two-thirds 
vot^  to  that  effect,  may  increase  or  diminish  the  rate  of  interest 
upon  loans  of  ninety-day  paper,  or  any  less  term,  and  shall  not 
be  permitted  to  discount  or  loan  for  a  longer  period  than  ninety 
days.)1  Its  directors  may  establish  a  "  good  service  fund  "  for 
the  benefit  of  the  clerks  and  officers  of  the  bank,  and  may  es- 
tablish such  extra  compensation  for  terms  of  service  in  the  bank 
exceeding  ten,  fifteen,  twenty,  or  twenty-five  years,  as  may  seem 
proper  to  them. 

In  case  of  the  failure  of  any  of  the  banks,  owners  of  the  stock 
of  the  Associated  Bank  at  New  York,  the  Associated  Bank  shall 
pay  for  and  retire  such  stock  at  par  and  the  accumulated  surplus 
to  the  Comptroller  of  the  Currency,  and  shall  retain  suchs  tock 
having  the  authority  to  issue  it  to  any  National  Bank  which  may 
be  formed  after  the  date  of  the  passage  of  the  proposed  act,  and 
not  provided  for  therein.  If  no  such  transaction  takes  place 
within  one  year  from  the  date  of  the  purchase  of  the  stock  of 
the  failed  bank,  then  such  stock  shall  be  cancelled,  and  shall  no 
longer  be  a  part  of  the  capital  of  the  Associated  Bank,  at  New 
York. 

The  bank  should  not  be  permitted  to  make  any  dividend  exceed- 
ing 6  per  cent,,  upon  the  capital  until  the  surplus  equals  50 
per  cent,  of  its  proposed  capital ;  it  shall  then  declare  six  per 
cent,  upon  the  capital  to  the  banks  as  stockholders,  and  three 
percent,  upon  the  surplus  of  say,  $15,000,000  to  the  Govern- 

1  The  object  of  this  proviso  is  that  the  same  method  of  defending  our  specie  reserves 
may  be  practicable  as  is  now  used  by  the  Ranks  of  France,  Germany,  and  England 
To-day,  owing  to  our  usury  laws,  we  are  without  any  defence  against  a  rapid  drain  of 
gold. 


APPENDIX.  321 

merit,  retaining  all  other  surplus  earnings  until  the  surplus  equals 
the  capital,  when  the  earnings  shall  be  divided  in  the  following 
manner:  6  per  cent,  to  the  banks  as  stockholders;  6  per 
cent,  to  the  Government  upon  the  surplus  —  say  $30,000,000 ; 
and  the  total  excess  to  the  holders  of  the  stock.  The  Govern- 
ment would  thus  receive  a  fair  compensation  for  the  privileges 
granted  the  bank. 

The  charter  to  run  for  the  term  of  thirty  years,  unless  abro- 
gated by  joint  assent  of  the  Government  and  the  banks,  and 
subject  to  amendment  at  any  time  upon  a  similar  basis. 

Calling  your  attention  to  the  statement  as  to  the  rapid  dis- 
appearance of  the  National  Currency  made  in  my  preliminary 
remarks,  I  further  propose  that  the  legal  tenders,  silver  certificates 
and  gold  certificates  shall  be  retired,  and  in  their  place  that  a 
2  per  cent,  bond  be  issued  —  except  that  the  notes  of  all  kinds 
retired  be  converted  into  a  legal  tender  issue,  only  to  be  used 
under  the  circumstances  to  be  pointed  out  hereafter.  The  con- 
solidation thus  effected  would  give,  say  $158,500,000  gold  certifi- 
cates, $240,600,000  silver  certificates,  and  $346,700,000  legal 
tenders ;  in  all,  say  $750,000,000  (including  gold  and  silver 
certificates  in  the  Treasury),  of  National  Bank  Currency:  the 
notes  only  to  be  changed  into  their  new  form  as  the  National 
Bxnk  Currency  takes  the  place  of  such  notes.  This  would  free 
for  the  Government  $332,000,000  of  gold,  and  $250,000,000  of 
silver,  say  $582,000,000,  which  would  be  applied  to  the  pay- 
ment of  the  4|  per  cents,  say  $180,000,000 ;  the  payment  over 
to  the  bank  of,  say  $100,090,000  of  the  money  due  the  banks 
on  account  of  "  reducing,  retiring,  etc.v  bank  notes,  they  assent- 
ing thereto.  The  balance  carried  by  the  Government  hereafter 
on  its  own  account  need  not  exceed  $50,000,000  —  total,  say 
$330,000,000.  The  excess,  say  $250,000,000,  could  be  applied 
to  the  purchase  of  the  4  per  cent,  bonds,  of  which  there  are 
$680,000,000  outstanding.  The  Secretary  should,  however,  be 
empowered  to  issue  Treasury  warrants  or  bills  at  such  rate  of 
interest  as  may  be  agreed  upon  from  time  to  time,  to  meet  any 


322  APPENDIX. 

sudden  emergency,  and  be  accountable  to  the  House  of  Repre- 
sentatives as  to  the  necessity  for  such  issue. 

If  the  system  proposed  should  be  adopted  in  its  entirety,  it 
would  save  the  nation  $10,000,000  per  annum.  The  issue  of 
the  converted  notes,  or  "  unified  national  debt,"  would  be  made 
should  any  national  bank  notes  fail  to  be  redeemed  according  to 
the  terms  of  issue,  if  not  retired  by  the  Associated  National 
Bank.  The  issue  of  small  notes,  say  ones,  twos,  and  fives  — 
you  may  add  tens  —  by  the  banks,  redeemable  in  silver,  would 
take  up  the  silver  paid  into  the  bank  by  the  Government,  and 
while  no  profit  would  be  made  on  that  part  of  the  issue  by  the 
banks,  the  profit  would  be  made  on  the  larger  notes,  if  not  taxed, 
as  they  should  not  be.  The  useless  carting  to  and  fro  of  the 
national  bank  notes  would  be  saved,  and  the  present  costly 
method  of  handling  these  notes  be  obviated.  By  providing  that 
the  banks,  upon  deposit  of  coin  and  bullion,  could  extend  their 
issues  to  any  amount,  the  transfer  of  coin  from  point  to  point 
could  be  saved,  with  a  corresponding  reduction  of  the  rate  of 
exchange  to  the  people,  thus  guaranteeing  an  ample  supply  of 
currency.  By  providing  a  reserve  power  of  issue  in  the  Associ- 
ated Bank,  so  that  if  money  become  dear  it  could  issue,  say 
$40,000,000  of  notes  in  time  of  need,  or  such  sum  as  might  be 
needed,  which  should  be  withdrawn  as  soon  as  the  need  ceased, 
we  can  guard  against  excessive  stringency  at  any  time,  and,  by 
providing  for  their  return,  excessive  expansion.  With  these 
notes,  and  those  issued  by  the  national  banks,  we  would  have  a 
flexible  and  automatic  currency,  protecting  us  against  extremes 
of  either  need  or  excessive  issues  of  paper  money.  The  extrav- 
agant use  of  the  public  monevs  would  be  repressed,  if  not 
avoided,  and,  as  I  have  said  before,  an  annual  expenditure  of 
$10,000,000  be  saved  to  the  country.  I  have  not  treated  the 
silver  phase  of  the  proposed  scheme  because  I  believe  one  of  two 
things  will  happen,  —  either  we  will  be  upon  a  silver  basis  before 
this  change  could  be  effected,  or  England  will  be  compelled  to 
come  into  an  international  scheme  for  an  extended  use  of  silver. 
So    believing,    I    think   this    country   can    buy    without   injury 


APPENDIX.  323 

$24,000,000  of  silver  per  annum,  and  take  its  chances  as  to  its 
ultimate  appreciation  ;  one  thing  is  certain,  that  if  we  fall  to  a 
silver  basis,  the  Government  can  pay  its  obligations  with  the 
bullion  so  purchased  at  an  apparent  profit  to  itself  —  how  it  may 
result  as  to  the  nation  is  another  and  greater  question. 


INDEX. 


Absorption  of  money  by  Sub-Treasury, 
212.  See  also  contraction  and  cur- 
rency. 

Accounts  of  Sub-Treasury,  how  kept,  93, 
in. 

Accumulation  of  currency,  147. 

Adams,  H.  C,  quoted,  113. 

Administration,  English  and  American, 
217. 

Advantages  of  bank  depositories,  254,  267. 

Advantage  of  Independent  Treasury,  2 17, 
220,  221. 

Aid  to  Government  from  banks,  103-107, 
113,  115,  117,  145. 

Amount  of  money  needed,  121,  125,  133. 

Andrews,  E.  B.,  quoted,  210. 

Arguments  against  Sub-Treasury,  25,  34, 
43.  46,  5°.  6o.  238. 

Assistant  Treasurers,  S3,  84. 

Associated  National  Bank,  proposal  of 
C.  N.  Jordan  for,  252. 

Atkinson,  Edward,  quoted,  131,  foot-note  ; 
•37- 


Bank,  scheme  of  a,  proposed  by  L.  D. 
Treackle,  24 ;  by  Secretary  Evving, 
32 ;  by  President  Tyler,  34 ;  by 
Horace  Everett,  35. 

Associated  National,  by  C.  N.  Jor- 
dan, 252. 

Of  England,  213,  224. 

Of  France,  227. 

Of  Germany,  229. 

Of  Russia,  231. 

Of  Ireland,  225. 

Of  Italy,  231. 

Of  United  States.  First,  2  ;  constitu- 
tionality of,  11:  aid  of,  in  public 
debt,  115;  Second,  chartered,  4; 
management,  5,  6,  12,  13,  14;  con- 
stitutionality, 11,  36;  services  of,  13, 
115,220,234;  fall  of,  15. 

Reserves,  and  Sub-Treasury,  130, 
133,  134;  importance  of,  131,  137; 
amount  of,  132;  variations  in,  132, 

'34'  '37- 
Bank  notes,  receipt  of,  by  public  officers 
prohibited,  20. 


Hank  notes,  effect  of  Sub-Treasury  on,  63. 
Of  country  banks,  147. 
Amount,  164. 
Bank  war,  6,  10,  13,  14. 
Bankers'  Magazine,  views  on  Sub-Treas- 

.ury.  37.  97- 
Banking  in  U.  S.,  220,  223. 
Banks,  effect  of  Sub-Treasury  on,  45,  46, 
59,  163,167,  ch.  vi.  212. 
New  York,  in   1S57,  177. 
Of  issue,  feeling  against,  8. 
State,  growth  of,  19;  as  fiscal  agents, 
2,  15,  ch.  ii.  17,  18,  22,  36,  257,  264. 
Losses  from  use  of,  31,  So. 
Loans  from,  to  Government,  65. 
And  taxation,  235. 
Favoritism  towards  depository,  235. 
In  1853,  condition  of,  176. 
In  1S57,  177. 
In  1873,  x83,  186. 
In  1890,  194,  195. 

Effect  of  Government  action  on,  199. 
Effect  of  bond  purchases  on  circula- 
tion of  notes  of,  205. 
National,  69;  services  of,  71,  74,  75, 
78,  113  ff.,  155;  as  depositories,  69, 
71.  77,  79.  8°.  85>  87,  "'.  232,  236, 
257  ff.  ;    reserves  of,   130-134  ;    aid 
of,  to  Treasury,  78,  145,  155;  secu- 
rity required  from,  86;  and  resump- 
tion,  116;   and  Sub-Treasury,  151, 
168. 
Barings,  failure  of,  191,  253. 
Belmont,  August,  &  Co.,  115. 
Biddle,  Nicholas,  11. 
Bland  Silver  Law,  91. 
Bonds,  purchase  of,  53,  59,  64,   173,   17=;, 
178,  180,  185,  189,  190,  192,  196,  19  1, 
202,  203,  205. 
Price   of,  forced  up  by  Government 

purchases,  158,  176,  180,  206. 
Method  of  placing,  103,  107,  114,  131. 
Required  from  depositories,  86,  236. 
Boutwell,  Secretary,  and  panic   of    1S73, 

182,  iS,. 
Buchanan,  President,  on   Sub-Treasury, 

63- 
Business,  influence  of  Sub-Treasury  on, 
ch.  vi.  123  ff. 


325 


326 


INDEX. 


Call-loans.  See  also  discount  and  interest, 

183,  187,  194,  195. 
Capital,  loanable,  and  Sub-Treasury,  124. 
Certificates,  clearing-house,  188,  192,  195, 
200. 
Of  deposit,  70,  90,  122. 
Chase,  Secretary,  and  the  banks,  59,  103, 

105. 
Circulation,    bank,   effect   of    bond    pur- 
chases on,  205. 
Increase  in  monetary,  from  Govern- 
ment disbursements,  190,  198. 
Of  silver,  91. 
Civil   War  and    Sub-Treasury,   100,    102, 

231- 
Clay,    Henry,   views    on    Sub-Treasury, 

,32. 
Clearing  house,  254,  257,  259,  265. 
Certificates  of,  188,  192,  195,  200. 
New  York,  73,  116. 
Cobb,  Secretary,  177. 
Coin  in  Sub-Treasuries,  1853,   176;   1857, 

.78. 
Collectors  of  public  money,  87. 
Colton,  Calvin,  on  Sub-Treasury,  97. 
Commercial  panic,  209. 
Commercial  currency,  156. 
Compensation  of  depositaries,  84. 
Conditions  of  success  in  Government  re- 
lief of  crises,  201. 
Constitutionality  of  national  bank,  n,  36. 
Constitutional   Treasury.     See    Indepen- 
dent Treasury. 
Contraction  of  currency,  101,  114,  117,  123, 
138,    139,    M5.    '5°,    l67>   177.  214, 
227,  239,  241. 
Of  bank  loans,  177. 
Cooke,  Jay,  &  Co.,  115,  185,  188. 
"  Cornering"  the  Treasury,  206. 
Counterfeit  money,  treatment  of,  94. 
Credit,  growth  of,  121,  130. 
Influence  of,  123. 
And  Sub-Treasury,  130. 
And  prices,  210. 
Crises,  kinds  of,  208  ff . 

And  Sub-Treasury,  135,  143,  151,  152, 

212,  ch.  vii.     See  also  panics. 
Bond  purchases  in,  202. 
Crisis,  phenomena  of  a,  211.     See  panics. 
Criticisms  on  Sub-Treasury,  25,  31,  34,  37, 

43,g6ff. 
Currency,  issue  and  redemption  of,  90  ff. 
Monthly  statement  of,  89,  160,  193. 
System  of,  in  U.  S.  and  Sub-Treasury, 

146,  154.  156. 
Interior  movement  of,  196. 
Contraction  and  expansion,  101,  no, 
114,   119,   137,    138,    140,    146,    150, 
164,   208,   210,   227,   230,  239,  241, 
245,  261. 
Transfers  of,  see  transfers. 
Customs,  receipts  from,  148. 


Danger  of  government  interference,  200. 
Debt,  public,  and  the  Sub-Treasury,  98, 
158. 
Redemption  of,  199.     See  bonds. 
Defects  of  Independent  Treasury,  112. 
Dependence  of  Government  on  banks,  105 

ff.,238. 
Depositaries,    84,   87.     See  also  deposi- 
tories. 
Depositories,  U.  S.,  advantages  of  secur- 
ing, 43,  76- 
National  banks  as,  69,  76,  77,  79,  80, 
85,  109,  in,  232,  236,  257  ff.     See 
Banks,  National. 
Locations  of,  83. 
Deposits,  removal  of,  17. 

Government,  in  banks,  135,  168,  266. 
Difficulty  of  withdrawal  of,  239. 
In  Sub-Treasuries,  90,  122. 
Surplus,  261. 
Provisions  for,  259. 
Diffusion  of  loans,  103,  107. 
Disadvantages  of  Sub-Treasury,  238. 
Disbursements,    Government,    128,    137, 

152,  154,  192. 
Disbursing  officers,  87,  89. 
Discount,  variable  rate  of,  227,  248,  262. 
Rates   of,   183,    187,    194,    195.      See 
also  Interest. 
Discounting  in  panics,  173. 
Distrust  in  panics,  183,  188,  190,  194,  196, 

209. 
Drafts,  payment  of  Government,  47,  51, 

56,  60,  69. 
Duties  of  Sub-Treasuries,  122.  See"  work 
of." 


Elasticity  of  currency,  123,  156,  191,  221, 

248,  250,  261. 
Employees  in  Sub-Treasuries,  number  of, 

83- 
England,  Bank  of,  191,  200. 

Method  of  keeping  public  money  in, 
224  ff . 
English  Constitution,  218. 
Everett,  Edward,  on  "specie-clause,"  44. 
Everett,  Horace,  plan  for  bank,  35. 
Evils  of  depository  banks,  246,  249. 

Of  Independent  Treasury,  53,  96,  112, 
123,  126,  129,  136,  141,  159. 
Ewing,  Secretary,  on  Sub-Treasury,  31. 

Plan  for  bank,  32. 
Exchange,  foreign,  196,  213. 
Exchequer,  plan  of,  proposed   by  Presi- 
dent Tyler,  34- 
Expansion  of  currency,  146,  208,  210,  227, 
230,  239,  241,  250,  261. 
By  banks,  165,  177. 
Expense  of  Independent  Treasury,  83. 
Export  of  gold,  196,  213. 
Extra  issues  of  bank  notes,  261. 


INDEX. 


327 


Failure    to    relieve   crisis,    178,  182,  186, 

igo,  196,  199,  201. 
Fairchild,  C.  S.,  Secretary,  quoted,  141, 

203. 
Favoritism   of    executive    towards    bank 

depositories,  235,  238. 
Fiscal  system  needed  in  war,  118. 
Folger,   C.    J.,    Secretary,   quoted,    136, 

foot-note. 
Forced  debt  payment,  15S. 
France,  bank  of,  227. 

Method  of  keeping  public  money  in, 

227. 
French  indemnity,  n. 

Germany,  Reichsbank  of,  229. 
Gibbons,  J.  S.,  on  Sub-Treasury,  9S. 
Gold,   effect   of  California  discovery  of, 

53,  '74- 

Exports  of,  146,  196,  213. 

Imports  of,  178. 

Board,  of  New  York,  119. 

Reserve,  78,  in,  145,  155. 

Sales  of,  182. 

Speculation  in,  70,  m,  119.  See 
speculation. 

Standard,  155. 
Gordon,  Sen.,  proposes  Sub-Treasury,  25. 
Gouge,    Wm.  M.,  on  Sub-Treasury,  27, 

"   48,  54  ff- 
Government  interference,  199. 

Loans,  64  ff. 
Greenback  reserve,  201. 
"  Greenbacks."     See  U.  S.  notes. 
Grosvenor,  \V.  M.,  quoted,  141. 
Guthrie,  Secretary,  on  Sub-Treasury,  52, 
59,  211. 

Hamilton,  Alex.,  2. 

Harter,  M.  D.,  cm  national  banks,  258. 

Hoarding,  187,  189,  190,  197,  198,  203. 

Implied  powers.     See  constitutionality  of 

U.  S.  bank,  199,  note. 
Imports,  gold,  1S57,  178. 
Independent  Treasury  recommended,  23, 
25. 

Arguments  against,  25,  33,  34,  43  ff. 

Arguments  for,  26. 

Bill  for,  defeated,  26  ;  established,  29; 
Secretary  Ewing  on,  31  ;  repealed, 
31;  President  Polk  on,  35;  Bank- 
ers' Magazine  on,  37;  re-estab- 
lished, 38;  provisions  of  law,  41 
ff. ;  difficulties  of,  46 ;  in  Mexican 
War,  47  ;  defects  in  law,  50,  51,  60. 

Gouge's  report  on,  54  ff. ; 

Break-down  of,  66,  68,  69,  70,  78, 
104,  109; 

Spirit  of,  violated,  65. 

Organization  of,  82  ;  expense  of,  83  ; 
duties,  122. 


Independent  Treasury  (continued): 

Effect   of,  on  specie   circulation,  49, 
50;  on  prices,  53,  112,  123,  126;  on 
credit,  124,  130;  on  rate  of  interest, 
123,  212;  on  currency,  126,  154;  on 
bonds,    158;    on  business,  ch.  vi. ; 
on  silver,  91,  154,  157. 
Public  debt  and,  98. 
Banks  and,  151,  163. 
Surplus  and,  58,  136,  141,  155. 
Resumption  and,  73. 
Refunding  and,  74,  112. 
Politics  and,  96. 

Crises  and,  ch.  vii.  178,  182,  1S8  ff., 
192   ff.,  196,  198.     See  Crises  and 
Panics. 
In  war,  100  ff.,  11S,  119,  231. 
Defects  of,  96  ff.,  112,  129,  152,  159, 

222,  23S,  245. 
Limitations  of,  201,  202,  207  ff.,  210, 

212. 
Advantages  of,  217,  220. 
Reasons  for  adoption  of,  220,  221. 
Substitutes  for,  chaps,  viii.  and  ix. 
Inductive  method,  125. 
Industrial  crisis,  20S. 
Inflation,  no,  119,  140,  164,  166,  191,  213 

248,  267. 
Influence    of   Independent   Treasury    in 

crises,  151,  178,  200,  212,  213. 
Instruments  of  credit,  130. 
Interest,  rate  of,  and  Sub-Treasury,  123. 
And  prices,  123. 
On  balances,  263. 

Prepayment  of,  on  public  debt,  170. 
Rate  of,  212. 
Interference,  Government,  199. 
Interior,  movement  of  money  to,  135,  137, 

196. 
Internal  revenue,  no. 
Interpretation   of  law  by   executive   offi- 
cers, 240. 
Ireland,  bank  of,  225. 
Irregularity    of    action    of     Independent 

Treasury,  129,  136,  141,  152. 
Italy,  Bank  of,  231. 

Jackson,    Andrew,    popular    feeling    to- 
wards, 9. 
Attack  on  U.  S.  bank,  n. 
Financial  ability  of,  9,  10. 
Opinion  of  state  banks,  16. 
Jordan,  Treasurer,  C.  N.,  views  on  Sub- 
Treasury,  76,  79. 
Plan  of,  for  an  Associated  National 
Bank,  252. 

Knox,  J.  J.,  plan  of,  to  secure   elasticity 
of  currency,  251. 

Laissez-faire,  199. 
Latin  races,  218. 


328 


INDEX. 


Laughlin,  J.  L.,  on  Sub-Treasury,  98. 
Laws,  economic  and  social,  219. 
Limitations    on     Government     relief    of 
panics,  189,  190,  198,  199,  201,  202, 
207  ff. 
Loans,  placing,  under  Independent  Treas- 
ury, 101,  102  ff. 
Bank,  in  New  York,  1857,  177. 
Of  banks  to  Government,  65. 
Locations  of  Sub-Treasuries,  83,  84. 
Loss  of   public  money,  how  to  be  made 
good, 260. 
From  forced  debt  payment,  203. 
From  depository  banks,  31,  80. 
Louisville,   Ky.,  proposed   Sub-Treasury 
at,  76,  122. 

Management  of  banks,  247,  248. 
Market,  money,  affected  by  Sub-Treasury, 
167. 
Relief  of,  175,  178,  183,  184,  185,  187, 
ff.,  192  ff.,  195,  201. 
McKinley  tariff  (see  ch.  vi.),  191. 
Mexican  War,  47,  101. 
Mill,  J.  S.,  quoted,  211. 
Money,  volume  of,  123,  133,  147. 
And  prices,  125  ff.,  141,  210. 
Market,  167,  175,  178,   183,  184,  185, 

187  ff.,  192  ff.,  195,  201. 
Power,  125. 
Morality,  laws  of,  219. 

National  banking  law,  236. 
National  banking  system,  257. 
National  banks,  established,  69. 

As  depositories,  69,  71,  77,  79,  85,  87, 
in,  231  ff.,  236,  238,  246,  251,  254, 
261. 
And  resumption,  74. 
Service,  to  Government,  74,  78,  80. 
Security  for  Government  deposits  in, 

84,  223,  238,  265. 
Reserves,  30,  34,  139,  150,  263. 
And  Sub-Treasury,  151,  212. 
Redemption  of  notes  of,  250. 
New  York  banks  and  the  Treasury,  65,  74. 
New  York  Sub-Treasury,  50,  77,  87,  88, 

128,  137. 
New  York  Warehouse  and  Security  Co., 
failure  of,  1S5. 

Objections  to  Sub-Treasury,  238. 
Organization   of    Independent   Treasury, 
ch.  iv.,  82. 
Of  New  York  Sub-Treasury,  88. 
Over-trading,  59,  211. 

Panics,  1837,  19  ff.,  164. 
1854,  176. 

1857,  61,  176,  209,  225,  244. 
1873,  180,  1S5  ff.,  201,  209. 
1890,  91,  172,  190  ff.,  198,  206. 


Panics,  commercial,  209;  how  checked  in 
England,  225;  Fiance,   229,  Ger- 
many, 230. 
Plans  for  relief  in,  250  ff.,  267. 

Payeurs-general,  Tresorerie,  228 

Pensions  payments,  152,  154,  159. 

Plans  to  remedy  evils  of   Sub- Treasury, 
chaps,  viii.,  ix. 

Plans  for  relief  in  panics,  250  ff.,  2(9. 

Political  influence  of  banks,  234. 

Politics  and  Independent  Treasury,  96. 

Polk,  President,  views  on  Sub-Treasury, 

.35- 

Premium,  purchase  of  bonds  at  a,  203. 
Prices,  influence  of  Sub-Treasury  on,  123, 
130. 

And  rate  of  interest,  123. 

And  money,  125  ff.,  138,  141,  210. 

And  credit,  210. 

In  panic,  210,  212. 
Progress,  Anglo-American  mode  of,  218. 
Promptness  of  payment  by  Government 

depositories,  243,  266. 
Public  moneys,  82,  88. 

Safety  of,  223,  265. 

Use  of,  by  banks,  239,  241. 

Receipts  of  Sub-Treasury,  88,  121,  128. 
Redemption   of   currency,  90,  93  ff.,  122, 
250, 

Fund,  263. 

Of  public  debt,  199.     See  bonds. 
Refunding  of  the  national  debt,  74. 

Influence  of  Sub-Treasury  on,  112  ff. 
Reichsbank  of  Germany,  229. 
Relativity  of  institutions,  217,  219. 
Relief  in  crises,  163  ff  ,  175,  176,  178,  183, 

184,  187  ff.,  192  ff.,  195,  201,  261. 
Reports  of  depositories,  260. 
Reserve,  greenback,  201. 

Gold,  78,  in,  134,  145,  201. 
Needed  in  country,  246. 
Reserves,    bank,    130,   137,   147-149,   183, 

185,  186,  194,  195,  263. 
Restraint     of     bank     issues,    174.       See 

"speculation." 
Of  speculation,  212.     See  also  banks 
and  speculation. 
Resumption  of  specie  payments,  73,  116. 
Revolution,  218. 
Richardson,  Secretary,  185,  202. 
Russia,  231. 

Safety  of  public  money,  223,  238,  265. 
San  Francisco,  telegraphic  transfers  from, 

to  New  York,  91. 
Savings  banks  in  1873,  187. 
Schemes  to  replace  Sub-Treasury,  chaps. 

viii.,  ix. 
Schurz,  Carl,  quoted,  22. 
Secretary  of  the  Treasury,  power  of,  202, 

239,  241. 


INDEX. 


329 


Security  for  Government  deposits  in  na- 
tional banks,  86. 
Sherman,  Secretary,  views  on  Sub-Treas- 
ury, 77. 

On  national  banks,  112. 
Silver,  and  the  New  York  banks,  77. 

And  Sub-Treasury,  154- 

Currency,  90,  91,  154,  157,  171,  174- 

Price  of,  191. 
Society  in  the  U.  S.,  1830-1850.  7. 
Sources  of  Sub-Treasury  receipts,  SS. 
Specie,  in  banks,  176,  183,  186. 

In  Sub-Treasuries,  76,  181,  195. 

Circular,  20. 

Clause  of  Sub-Treasury  law,  25,  37, 
38,44,  62. 

Circulation  and  Sub- Treasury,  49,  50. 

53- 
Payments,  165,  179. 
Speculation,  61,  129,    163,   165,   167,   178, 
182,  198,  199,  211,  212,  214. 
In  gold,  in. 
Stock-market,  panic  in,  183,  187,  195. 
Stringencies,     caused     by      Independent 
Treasury,    181,    194,   210.      See  also 
crises  and  panics. 
Storage  of  public  money,  92. 
Sub-Treasuries,  specie  in,  1853,  176;  1857, 
178. 
Advantages  of  locating,  43,  76. 
New  York  Sub-Treasury,  87  ff. 
Work  of,  S5. 

Success  in  relieving  crises,  conditions, 
of  209  ff. 
Sumner,  W.  G.,  quoted,  121. 
Supervision  of  Independent  Treasury,  82. 
Surplus  earnings  of  depositories,  261. 
And  circulating  medium,  121,  173. 
Deposits,  260,261. 
Distribution  of,  in  1837,  21. 
Revenue  and   Sub-Treasury,   58,  136, 
141,  i43.  '55..  158,  173.  174,  246. 
Suspension  of  specie  payments  by  banks, 
19,  61,  66. 
By  the  Government,  67,  70,  109. 
Syndicates,  use  of,  by  Government,  113. 

Tariff,  143,  152,  213. 

Taussig,  F.  W.,  quoted,  78,  143,  155,  176. 
Taxation  and  Independent  Treasury,  98. 
Telegraphic  transfers  of  money,  91. 


"  Three-sixty-five  bond  plan,"  250. 
"  Timing  "  government  payments,  170. 
Transfer  of  public  money,  52,  56,  60,  69, 
82,  89,  91,  199,  261,  266. 
Of  private  money,  91,  122,  171. 
Treackle,  Littleton  D.,  proposal  for  bank, 

24- 

Treasury  department,  206,  218. 

Dependence  of ,  on  depository  banks, 
239.     See  Independent  Treasury. 
Tresorerie -pay eurs -general,  228. 
Tyler,  Pres.,  views  on  Sub-Treasury,  30. 

Action  concerning,  32. 

Exchequer  plan  of,  34. 

United  States  notes,  59,  104,  109,  122,  146. 
Usury  laws,  169,  262,  267. 

Van  Buren,  President,  22. 

Views  on  Sub-Treasury,  23. 
Service  of,  29. 
Variations  in  Government  cash,  160. 
Vaults    of     Sub-Treasuries.       See    Sub- 
Treasury  law  and  Gouge's  descrip- 
tion, 92. 
Volume  of  money,  123. 

Walker,  General  F.  A.,  quoted,  223. 
Walker,  J.  H.,  criticism  of  Sub-Treasurv, 

98. 
Walker,  Secretary,  on  Sub-Treasury,  35, 

44,  48. 
War,  use  of  banks  during,  115,  117. 
Independent  Treasury  in,  118. 
Civil,  231. 
Mexican,  47,  101. 
Webster,  Daniel,  on  Sub-Treasury,  26,  50. 
Windom,    Secretary,     objections     of,    to 
national  bank  depositories,  79,  87, 
99,  238  ff. 
Bond  purchases  of,  204. 
In  crisis  of  1890,  192. 
Withdrawal  of  deposits,  difficulty  of,  239, 

243  ff. 
Woodbury,  Levi,  Secretary,  23. 
Work  of  Sub-Treasuries,  present,  85. 
Wright,  Silas,  proposes  Sub-Treasury,  25, 
28. 

Young,    Andrew   D.,    opinion    of    Sub- 
Treasury,  38,  96. 


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